Fed Presses Pause on Rate Cuts

The Fed held rates steady, inflation aligned with projections, and low existing home inventory boosted signed contracts for new homes. Read on for these stories and more:

·      Fed Presses Pause on Rate Cuts

·      Fed’s Favored Inflation Measure Meets Forecasts

·      New Home Sales Exceed Expectations

·      Pending Home Sales Experience First Decline Since July

·      National Home Prices Reach New Heights

·      Also, of Note

Fed Presses Pause on Rate Cuts

Following a series of rate cuts in September, November, and December, the Federal Reserve held rates steady, maintaining its benchmark Federal Funds Rate between 4.25% and 4.5%. This pause on further cuts was expected and the vote was unanimous.

When the Federal Reserve raises or cuts rates, they are adjusting the Fed Funds Rate – a short-term, overnight rate that banks use for interbank lending. This benchmark rate serves as the foundation for all other interest rates, though it is not directly tied to mortgage rates or long-term rates.

What’s the bottom line? The Fed began aggressively raising the Fed Funds Rate in 2022 to combat surging post-pandemic inflation. However, they started cutting last September due to moderating inflation and rising unemployment. The Fed's decision to pause further rate cuts last week was partly due to slowing progress towards their 2% inflation target.

After the meeting, Fed Chair Jerome Powell emphasized that the Fed does “not need to be in a hurry to adjust our policy stance.” Future decisions regarding rate cuts will heavily depend on upcoming labor and inflation data.

Fed’s Favored Inflation Measure Meets Forecasts

The Federal Reserve's preferred inflation measure, Personal Consumption Expenditures (PCE), met estimates in December. Headline PCE rose 0.3% from November, with the year-over-year rate climbing from 2.4% to 2.6%. Core PCE, which excludes volatile food and energy prices, increased 0.2% monthly, while the annual rate held steady at 2.8% - near the lowest level in over three years.

What’s the bottom line? Shelter costs, which comprise 18% of Core PCE, play a crucial role in progress toward the Fed's 2% inflation target. While shelter costs in PCE have been elevated when compared to more real-time rental data from places like Apartment List and CoreLogic, they have started to align more favorably in the government's report. As PCE better reflects softer real-time rental trends, annual inflation readings should decrease.

New Home Sales Exceed Expectations

In December, signed contracts for new homes increased by 3.6% from November, reaching a pace of 698,000 units, significantly above estimates and the highest since September. Compared to December of the previous year, sales rose by 6.7%.

What’s the bottom line? The combination of historically low existing home inventory and strong buyer demand has driven the rise in new home sales, despite elevated mortgage rates. However, more inventory is needed to satisfy ongoing buyer interest. Of the 494,000 new homes available at the end of December, only 118,000 had been completed; the remainder were either under construction or not started.

Pending Home Sales Experience First Decline Since July

After rising for four straight months, Pending Home Sales dropped by 5.5% from November to December per the latest report from the National Association of REALTORS® (NAR). This metric reflects signed contracts on existing homes, typically occurring one to two months prior to closing, and serves as a leading indicator of housing market trends.

What’s the bottom line? NAR Chief Economist, Lawrence Yun, observed that “contract activity fell more sharply in the high-priced regions of the Northeast and West, where elevated mortgage rates have appreciably cut affordability.” He also noted that “job gains tend to have greater impact in more affordable regions. It is unclear if heavier-than-usual winter precipitation impacted the timing of purchases.”

National Home Prices Reach New Heights

The Case-Shiller Home Price Index, widely regarded as the benchmark for measuring appreciation in home values, revealed a 0.4% increase in home prices nationwide from October to November after seasonal adjustments. This marks a new peak, surpassing the previous month’s record. Year-over-year, home values in November were up by 3.8%, building on October’s 3.6% rise.

In particular, the 10-city composite index recorded a 4.9% year-over-year increase, while the 20-city index saw a 4.3% uptick, indicating that major urban areas are growing even faster than the overall national trend.

Similarly, the Federal Housing Finance Agency’s (FHFA) House Price Index reported a seasonally adjusted increase of 0.3% from October to November, with prices 4.2% higher compared to the same period last year. It’s important to note that FHFA's Index differs from Case-Shiller’s as it excludes cash buyers and jumbo loans, focusing only on conforming mortgage financing.

What’s the bottom line? Homeownership remains a robust opportunity for wealth creation. For example, if you purchase a home for $600,000 and it appreciates by 4% within a year, you could see a gain of $24,000, reflecting a solid investment return.

Also, of Note

The initial estimate for fourth quarter 2024 GDP indicates that the U.S. economy grew by 2.3%. This comes after growth rates of 1.6% in the first quarter, 3% in the second, and 3.1% in the third quarter last year.

The increase in economic activity during the fourth quarter was largely fueled by rising government and consumer spending, although this was somewhat tempered by a decline in investment. Keep in mind that this data may be revised when the second and final estimates are released in the coming months.

Turning to unemployment, the latest claims data (Initial -16K to 207K; Continuing -42K to 1.858M) suggests that the labor market continues to maintain its current trend, with employers retaining their staff while also exhibiting a cautious approach to hiring.

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