The Federal Open Market Committee (FOMC) voted unanimously to keep interest rates steady at the current range. No surprise there. The committee kept to their promise to continue watching the data to gain more confidence that inflation is steadily moving towards 2%. Again, no surprise. Perhaps the only surprise one could take from the latest FOMC meeting was the Fed Chair’s dismissal of the higher-than-expected inflation readings in both January and February as seasonal and “still hot, but not terrible.” The Fed is giving inflation wide room to move lower while remaining confident it will reach the 2% target in the long run. Federal Reserve Chair Jerome Powell made it very clear, once again that the central bank is willing to be patient before making any changes to its policy and interest rates, even if it means keeping the “current target range for the federal funds rate for longer if appropriate.” On a positive note, and one the markets took hold of, Powell also said the “policy rate is likely at its peak for this type of cycle … and it will likely be appropriate to begin dialing back policy restraint at some point this year.”
The unofficial dot plot, a series of 19 anonymous projections from the committee members on the economy and interest rates, garnered the most attention by economists and the financial markets. The biggest take-away was a higher median fed funds rate in 2025 and 2026 and the longer run than what the December projections suggested. The median rate for 2024 remained at 4.60%, the equivalent of three 75-basis point rate cuts. The neutral fed funds rate of 2.6% will not be reached until after 2026. The dot plot also revealed the Fed believes economic growth will be stronger over the next few years, the unemployment rate will end this year at 4% (lower than previously expected) and inflation will take longer to recede.
KEY INDICATORS THIS WEEK
Housing – The latest data on the housing market is shining a glimmer of hope for the spring housing season. Sales of existing homes surged 9.5% in February, the strongest pace in over a year. Even better, February marked the first back-to-back monthly gains since November 2021. The data suggests the existing home sales market may be coming out of its slump as buyers are giving in to the “new normal” of higher rates and prices. Homeowners with a sub-4% mortgage rate are realizing moving is inevitable due to job, marriage or lifestyle changes. The inventory of homes for sale is up 10.3% from a year ago. Demand is still outweighing supply, which remains well below the measure of a tight market. Almost 20% of the homes sold in February were above list price, pushing prices up 5.7% from a year ago.
One saving grace that could help potential homebuyers this year is robust activity in the new home market. Housing starts rose 10.7% in February, the best pace in nine months. Single-family home starts alone rose 11.6% and are up over 35% from a year ago. Builders are able to offer incentives and rate buydowns to entice buyers. If rates can at least hold steady, this could be a home season to remember.
Market Reaction – The lack of an interest rate cut this week was fully expected, but the reaction from the equity market was not. The three key indices surged to new records, the Dow had its best single day since February and a new wave of risk-taking emerged, pushing even non-technology stock prices higher. Bond yields came off the highest levels since November with the shorter end of the curve falling the most. Odds for a June rate cut are just slightly higher than at the end of February, 64% from 52%.