The Federal Reserve’s rate-setting committee kept the short-term policy rate unchanged at the May meeting. The decision was widely anticipated by investors considering ongoing economic resilience. The central bank remains focused on bringing inflation to the 2.0% target while maintaining full employment.
The Federal Reserve has been under pressure recently to lower interest rates amid rising financial market volatility. However, members of the Federal Open Market Committee are keeping a firm eye on the trajectory of price growth, viewed through the lens of the late 1970s and early 1980s. Informed by the experience of that era, when an initial spike in inflation seemed tamed only to be worsened by a second wave, the Fed has been taking a steady two-pronged approach to monetary policy.
The Fed is using the overnight rate as the main prong of its current policy. After cutting the rate five times in six months this past year, the Fed has kept it steady while assessing incoming economic responses. The other prong the central bank employs is its balance sheet, which contains $6.7 trillion in Treasury and mortgage-backed securities. The Fed has been trimming its holdings by letting maturing securities roll off its balance sheet as a secondary and less-visible way to tighten monetary policy.
Looking at the main measures of inflation—the Consumer Price Index and the Personal Consumption Expenditures Index—the Fed’s actions have paid off over the past two years. Both measures are approaching the Fed’s desired threshold. However, rising wages, combined with newly-enacted tariffs, have been keeping upward pressure on prices, leading the Fed to maintain its current posture.
While gross domestic product recorded a mild decline in the first quarter, prompting concerns about a recession, broader economic data underscore ongoing resilience. The main risk to economic activity is continued financial pressure on households coming from higher monthly bills, combined with the looming threat of rising layoffs.
For real estate markets, today’s decision by the Federal Reserve translates into an ongoing floor for mortgage rates. While the Fed’s overnight rate does not directly impact long-term mortgage rates directly, it trickles through the financial system more broadly. Consumers looking at their monthly credit card, car or personal loan bills can expect continued high rates.
Housing affordability remains a central challenge for most Americans, whether they are looking to buy or rent. For buyers, home prices which are 50% higher than they were in 2019, coupled with current mortgage rates, translate into a $2,200 monthly payment on a median-priced home.
Retreating rents have been a silver lining for many people. The median effective rent runs around $1,800 per month. Considering a growing supply of new properties coming to market and lower monthly costs, it’s not surprising that demand for rental housing remains on solid footing.