The newest results from the Federal Reserve Open Market Committee (FOMC), the rate-setting body that meets roughly eight times per year, varied greatly from the previous one in mid-September, which came with a unanimous vote to hike interest rates, after many economists predicted that outcome.

This time there was no rate hike. The Fed left interest rates unchanged, despite inflationary pressures continuing to mount. The move was also not unanimous, as Federal Reserve officials voted 10-2 to keep interest rates unchanged, as two dissenters preferred raising rates. The Fed’s benchmark rates remained in the 3.75% to 4% range, as expected by observers. 

In a statement, the Fed claimed that “economic activity is expanding at a strong pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.

“Inflation remains elevated,” the Fed statement continued. “The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s 2% goal.”

Voting against the monetary policy action were Lisa D. Cook and Beth M. Hammack, who preferred to raise the target range for the federal funds rate by a quarter percentage point at this meeting. 

“Over the last couple of days, the committee had a good discussion of the changes in the economic and financial landscape that marked this period,” said Fed Chairman Kevin Warsh in a post-meeting news conference. “We discussed geopolitical developments and fast-moving changes in technology. 

“We observed, but we’re not surprised, that financial markets showed bouts of volatility and shifting correlations. So as we widen the frame to survey the broad economic and financial picture, real activity is clearly pointing in the right direction. That’s good news, but inflation is too high. Energy and related prices have moved higher again in recent weeks.”

Potential effects on housing

While Danielle Hale, chief economist at Realtor.com® proved correct in expecting the Fed to leave its policy rate unchanged, she anticipates another two to three hikes over the next six to eight months, which would mean a high-end rate range of 4.5% to 4.75%. 

“This is slightly above the high-end of Fed funds rate projections made in September, and would position the Fed funds rate roughly halfway between its December 2025 to September 2026 low of 3.5% to 3.75% and its 5.25% to 5.5% prior peak,” she said. “While the market and the Fed both seem to agree that some monetary policy restriction is warranted, most investors currently expect more restriction than the Fed has projected.”

Hale noted that investors have made a round-trip in risk pricing since just before the September Fed meeting. She explained that the 10-year yield rose from just under 5% to more than 5.3% before dipping just under 5% in recent days, while mortgage rates climbed from just below 7% to more than 7.45%. Mortgage rates have not dropped back to their mid-September level, and the housing market is feeling the effects. 

“Home shoppers shopping in this environment can still set themselves up for a better mortgage rate by boosting their credit, making a higher down payment and, most importantly, shopping around for a mortgage,” she said. “Those hoping to make a home purchase in the months ahead should plan for further mortgage-rate volatility and rate-proof their home shopping budget by testing out a range of possible mortgage rates so they’ll be prepared to react.” 

Like most others who watch closely, Melissa Cohn, regional vice president of William Raveis Mortgage and a 44-year industry veteran, wasn’t surprised by the lack of a rate hike. Her feeling is that oil prices will in great part determine what comes next, with the housing market also being affected.

“It all depends on how the bond markets react to the Fed’s decision,” she says. “Domestic oil is above $100 per barrel. Brent is up at $115 per barrel. That’s wildly inflationary. The 10-year Treasury is below 5% for the first time in over a month, but at some point, the high rising oil prices are going to bite us.

“Back in the early ’80s, mortgage rates were in the teens because of crazy inflation. No one can say that high sustained oil prices aren’t going to be inflationary, and we seem to just be ignoring it at the moment, unless someone knows something that I don’t know about how they’re going to bring prices back down.”

Dr. Selma Hepp, chief economist at Cotality, noted that the Fed continues to seek a balance between broader inflation pressures and increasingly tighter financial conditions, which is doing much of the job for them. 

“For consumers and the housing market, the critical point is this: The Fed can hold its policy rate steady, but if Treasury yields and the term premium remain elevated, mortgage rates can stay above 7% and affordability relief will be limited,” she says. “However, interest rates aren’t the only factor keeping homebuyers priced out of the market. Mortgage lenders underwrite for the total monthly cost of homeownership, and rising property taxes, utilities, insurance premiums and coverages, and homeowner association fees add hundreds of dollars per month. This means fewer qualified or willing buyers, fewer discretionary sellers, and, as a result, fewer home sales.”

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