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At their first meeting of the year, Federal Reserve policymakers indicated they’re in no hurry to cut rates in 2024, and will continue a “quantitative tightening” program that’s helped keep mortgage rates from falling more sharply from last year’s peaks.

The Federal Open Market Committee, which sets Fed policy, voted unanimously Wednesday to keep its target for the short-term federal funds rate at between 5.25 percent and 5.50 percent. That’s where it’s been since July when the Fed paused a series of 11 rate hikes that brought the federal funds rate to the highest level since 2001.

While the Fed doesn’t have direct control over long-term interest rates, mortgage rates started coming down in November and December on expectations that the Fed will cut short-term rates in 2024. At their final meeting of the year on Dec. 13, Fed policymakers released a summary of economic projections forecasting three rate cuts totaling 75 basis points this year.

The debate since then has centered on when the Fed might start cutting rates, and whether three rate cuts will be enough to keep the economy from becoming bogged down in a recession.

At a press conference following the committee’s latest meeting, Federal Reserve Chair Jerome Powell warned those who think rate cuts are imminent that while Fed policymakers are confident that inflation is cooling, they want to see a longer-term trend indicating that it’s coming down to the Fed’s 2 percent target.

“So we have six months of good inflation data,” Powell said. “The question really is that six months of good inflation data, is it sending us a true signal that we are in fact on a sustainable path down to 2 percent inflation? That’s the question. And the answer will come from more data.”

The Fed will see two rounds of payroll, inflation and price data and one report on consumer consumption before its March 22 meeting, Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients.

Ian Shepherdson

“In short, the door is open to rate cuts just as soon as the Fed is happy with the data,” Shepherdson said. “We think the inflation numbers before the March meeting will be favorable, so we still look for the first easing to come then. But it is a close call and a delay until May would be no surprise.”

A gauge of first-quarter employment costs won’t be available until after the Fed’s March meeting, and “some of the more hawkish members might insist on seeing [that data] before they pull the trigger,” Shepherdson said.

In a question-and-answer session with reporters, Powell said he doesn’t think a March rate cut is “what we would call the base case.”

“Based on the meeting today, I would tell you that I don’t think it is likely that the committee will reach a level of confidence by the time of the March meeting” to start bringing short-term rates back down, Powell said.

The CME FedWatch Tool, which tracks futures markets to predict the Fed’s future moves, showed that after the Fed’s Wednesday meeting, investors were putting the odds of one or more Fed rate cuts by Mar. 20 at just 39 percent, down from 88 percent on Dec. 29.

In addition to the federal funds rate, mortgage market observers are keeping an eye out for any signs that the Fed might ease up on efforts to trim its balance sheet, known as “quantitative tightening.”

The Fed has trimmed its balance sheet by more than $1.3 trillion since mid-2022, Powell noted — despite pleas from real estate industry trade groups who complain that quantitative tightening is keeping mortgage rates from coming down more sharply.

Fed trimming its balance sheet

Source: Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis

During the pandemic, the Fed was buying $80 billion in long-term Treasury notes and $40 billion in mortgage-backed securities (MBS) every month. The central bank’s $120 billion in monthly “quantitative easing” helped push mortgage rates to record lows — and the Fed’s balance sheet to record highs.

The central bank then reversed course to fight inflation and is now allowing $35 billion in maturing MBS and $60 billion in Treasurys to passively roll off the central bank’s balance sheet each month. In an implementation note, Fed policymakers indicated they intend to continue trimming the Fed’s balance sheet by $95 billion a month.

“I would start by saying that balance sheet runoff so far has gone very well,” Powell said at Wednesday’s press conference. “And as the process has continued, we are getting to that time where questions are beginning to come into greater focus about the pace of runoff.”

Powell said policymakers “had some discussion of the balance sheet” at Wednesday’s meeting, and “are planning to begin in-depth discussions of balance sheet issues at our next meeting in March. Those questions are all coming into scope now, and we are focusing on them, but we are at the beginning of that process, I would say.”

Mike Fratantoni

Mortgage Bankers Association Chief Economist Mike Fratantoni noted that “some Fed officials have recently indicated a desire to begin to slow the pace of runoff.”

MBA forecasters continue to expect the Fed will authorize three rate cuts this year, with the first cut likely to be approved in May.

“Inflation is dropping faster than many had anticipated, and the job market thus far is holding up quite well,” Fratantoni said in a statement. “This combination should mean its next move will be a cut in order to prevent the real fed funds rate from becoming overly restrictive, thereby increasing the risk of a sharper economic slowdown.”

Strong consumer demand and “somewhat lower” mortgage rates “should support a more robust spring housing market this year,” Fratantoni said.

The MBA’s weekly survey of lenders showed applications for purchase mortgages fell last week for the first time this year, following three consecutive weeks of increased homebuyer demand.

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Email Matt Carter

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