The Federal Reserve’s widely anticipated decision to maintain the federal funds rate at 3.5 percent–3.75 percent at its first policy-setting meeting of the year revealed a continuing divide among voting members. Dodd Frank Update consulted First American Senior Economist Sam Williamson about the implications to housing affordability.
Fed Govs. Stephen Miran and Christopher Waller represented the two dissenting votes in the Federal Open Market Committee’s (FOMC) Jan. 28 decision to pause the rate cuts after three consecutive quarter‑point cuts late last year, indicating they would have preferred for the agency to continue to lower rates.
Raising the bar for lowering rates
Williamson said the fact that six committee members voted to maintain the current federal funds rate suggests “a higher bar for additional easing as policy drifts back toward estimates of neutral.”
“Policymakers remain split on where neutral lies and how to balance the risks, with inflation still above target and the labor market only modestly cooler than conditions typically associated with full employment,” he said. “Against that backdrop, the Fed appears inclined to pause and evaluate how last year’s ‘insurance’ cuts are filtering through the economy.”
Acknowledging that there was “broad” support for holding rates steady during the Jan. 28 meeting, Fed Chairman Jerome Powell told reporters the agency will be making plans for future rate cuts and other quantitative easing activities on a meeting-by-meeting basis.
Williamson was not surprised at the Fed’s indication that its decision to keep rates unchanged in January should not be taken as an end to its quantitative easing agenda. He surmised that the Fed would view the cumulative cuts last year as a means of affording officials “room to move more deliberately, while monitoring incoming data and broader financing conditions.”
Labor market improvements
The committee’s support for holding rates steady was at least partially driven by improvement in the labor market. Powell explained that the Fed decided to remove concerning language about labor demand and employment from the FOMC’s implementation statement to account for “distortions in the data from the [government] shutdown.” Whereas previous statements said the Fed judged that “downside risk to employment rose in recent months,” the updated version indicated that employment had largely stabilized. However, he also acknowledged there was still some “tension” between employment and inflation that the committee will continue monitoring.
He also acknowledged that the Fed’s assessment of the labor market came despite elevated inflation and relatively low job gains. He acknowledged that a weakening labor market could necessitate further rate cuts moving forward while stressing that such a move must also account for the inflationary consequences, per the Fed’s dual mandate.
Slow but steady housing affordability gains
Based on the available data and the Fed’s assessment, Williamson said more rate cuts could be in store later in the year if inflation continues to ease in a sustained way or if economic growth weakens more than expected.
“With policymakers signaling a higher threshold for further easing, rate cuts may come later in the year and could ultimately be fewer, especially if economic growth firms as fiscal support and earlier easing bolster activity and help stabilize the labor market,” he explained. “That could leave 30-year, fixed mortgage rates in the low-6 percent range, drifting down only gradually throughout the year.”
While this may not seem to be the best-case scenario, Williamson noted that slower price growth and rising incomes have pushed housing affordability to its best level in three years.
“Improving inventory is also giving buyers more options, supporting cautious optimism for stronger existing‑home sales,” he said. “Together, these factors point to measured progress. The foundation for a healthier market is gradually forming, setting the stage for a gradual thaw as more life event-driven moves materialize, even if rates remain steady.”
The elephant in the room
Powell declined to answer questions about why he attended the Supreme Court hearing over mortgage fraud allegations against Fed Gov. Lisa Cook or the investigation launched by the Department of Justice into his Senate testimony regarding renovations to the Fed’s Washington, D.C., headquarters.
However, he did offer several words about the concerns these legal matters have raised about the Fed’s independence. He asserted maintaining its independence is important for the sake of maintaining the agency’s credibility with the public and the economy in the U.S. and beyond.
“If people lose the faith that we are making decisions only on the basis of our assessment of what is best for everyone – for the wider public – rather than trying to benefit one group or another, if you lose that, it is going to be hard to regain it,” he said. “And we haven’t lost it. I don’t believe we will. I certainly hope we won’t, but it is very important. The reason it is important is it has enabled central banks generally not to be perfect, but to serve the public well.”
He also declined to comment on questions about his interest in remaining a member of the Fed Board after his term as chairman expires on May 15. His term as a board member is set to run until Jan. 31, 2028.