The Federal Reserve’s rate-setting committee kept the short-term policy rate unchanged at the July meeting. Investors anticipated the Federal Open Market Committee decision due to the trajectory of price growth and resilient employment trends. The central bank maintains its focus on keeping employment stable and returning inflation to the 2.0% target.
Amid intensifying pressure on the Federal Reserve chairman to drop interest rates to lower borrowing expenses for the government, the members of the FOMC have maintained a steady approach to setting monetary policy. The overriding concern of the committee has been a resurgence in inflation, spurred by a steady job market and the economic shock of renewed import tariffs which historically have pushed prices of consumer goods higher.
Real gross domestic product rose at an annual pace of 3.0% in the second quarter of the year, buoyed by solid consumer spending. With resilient consumer spending driving economic activity, companies kept a stable pace of employment, leading to 782,000 net new jobs in the first six months of the year, a low unemployment rate and continued wage gains. At the same time, consumer prices experienced a rebound near the midpoint of the year. The Consumer Price Index rose from an annual 2.3% rate in April to 2.7% in June. And the Personal Consumption Expenditures Index ticked up from 2.2% in April to 2.3% in May.
There are concerns that American households may be under rising financial stress. The number of open jobs has been steadily dropping over the past four years. At the same time, many job seekers are spending longer looking for employment. Household debt remains near record high, leaving little cushion for consumers facing still-rising prices for food, utilities, housing, and medical services.
For the Federal Reserve, the policy interest rate—controlled through the Open Market Operations—is a valuable tool in its approach to maintaining economic stability, alongside the bank’s discount window and reserve requirements. Dropping the rate too fast in an environment of economic expansion would leave the bank unable to respond by further lowering the rate in case of an economic recession. While the FOMC noted that it is open to lowering the rate in the near term, it does not want to do so too soon and risk refueling price gains. This is one of the main lessons the bank internalized during the inflationary spikes of the late 1970s and early 1980s.
For capital markets, today’s decision by the Federal Reserve translates into steady interest rates. More specifically, rates for personal and auto loans, as well as credit cards will continue at elevated levels.
Mortgage rates are not dictated by the Fed’s overnight rate and move in tandem with longer-term bond yields. The 10-year Treasury has been moving in a narrow band between 4.2% and 4.5% most of this year, keeping the 30-year fixed mortgage rate anchored around a 6.8% average during the first seven months.
For real estate markets, the picture is nuanced as we move into the second half of the year and continue to wrestle with affordability challenges. On the one hand, for-sale inventory has been growing, with over one million homes currently listed on the market. At the same time, home prices have hit new highs, spurred by larger homes dominating listings during the warmer months. For buyers weighing home prices 50% above 2019 levels, current mortgage rates translate into a $2,800 monthly payment on a median-priced home.
On the other hand, rebalanced by a noticeable inflow of new units, the rental market has experienced moderating rents. The median rent across the country hovers around $1,800 per month, giving many Americans more affordable options.
For the Fed, the cost of housing remains a central concern, as it dictates a significant share of inflation metrics. However, bringing the cost of housing down will require more than a change in monetary policy.