The Federal Open Market Committee (FOMC)’s job is never easy as policymakers must sift through mounds of data to arrive at policy decisions that will never be universally applauded.
But the committee’s task has gotten more difficult with the return of Donald Trump to the White House. The president’s desire to overhaul the federal government and his “America First” policies that include hefty tariffs against some of the nation’s largest trade partners are making it more challenging for the 12 members of the FOMC to chart where the U.S. economy is headed.
Federal Reserve Chair Jerome Powell touched on some of these difficulties earlier this week when he spoke with reporters after the FOMC’s decision to leave benchmark interest rates untouched at a range of 4.25% to 4.5%.
“It is going to be very difficult to have a precise assessment of how much of inflation is coming from tariffs and from other (sources) — and that’s already the case,” Powell said Wednesday. “You may have seen that goods inflation moved up pretty significantly in the first two months of the year. Trying to track that back to actual tariff increases … is very, very challenging.”
Rate cuts still on the board
One of the more controversial actions that came out of this week’s FOMC meeting was tied to its Summary of Economic Projections (SEP). Most Fed policymakers still expect at least two interest rate cuts this year, although that number shrank compared to the previous SEP that was released in December.
But expectations for gross domestic product (GDP) growth in 2025 were pared back, with the median estimate from Fed officials dropping from 2.1% in December to 1.7% in March. And the median estimate for the Personal Consumption Expenditures (PCE) index — the Fed’s preferred inflation gauge — rose from 2.5% to 2.7%.
Powell said these forecasts are rooted in “really high uncertainty.”
“What would you write down? It’s really hard to know how this is going to work out,” he said. “We think our policy is in a good place. We think it’s in a good place where we can move in the direction we need to. But in the meantime, it’s really appropriate to wait for further clarity.”
‘No rush to ease policy’
Those might not be comforting words to housing professionals whose businesses have been decimated by the post-pandemic jolt to inflation and the Fed’s resulting interest rate hikes.
Residential mortgage origination volume plummeted from $1.22 trillion in the second quarter of 2021 to $323.53 billion in the first quarter of 2023, according to data from the Federal Reserve Bank of New York. The mortgage market has recovered only a fraction of that lost volume since then.
Emanuel Santa-Donato, senior vice president and chief market analyst at Tomo Mortgage, indicated there were no surprises in the Fed’s actions this week.
“The new SEP confirms what markets expected — rate cuts are coming, but don’t expect them to be fast or aggressive,” he said in written commentary. “The Fed’s latest forecast suggests only two cuts this year, reinforcing that Powell is in no rush to ease policy.
“With inflation expected to settle at 2.7% and unemployment ticking up to 4.4%, the Fed sees some room to cut, but the message is clear: Any relief from the Fed will be slow and measured.”
Mortgage rates remain a major impediment for prospective homebuyers even as the average 30-year rate has dropped from a recent high point of 7.87% in October 2023 to 6.80% this week, according to HousingWire’s Mortgage Rates Center.
Rob Cook, a Chicago-based vice president at Discover Home Loans, said that even though rates are near their historic average, consumers remain psychologically unattracted to them because of “the historic low rates observed during the pandemic.”
“Most homeowners who had mortgages took advantage of refinancing at those low rates,” Cook told HousingWire. “This has greatly reduced the supply of houses on the market, as existing homeowners are reluctant to move and thereby replace their current low mortgage rates with today’s higher rates.”
He also indicated that the Fed’s forecast for rate cuts this year isn’t out of line if key trends materialize.
“While many factors affect mortgage rates, economic data on inflation and employment are always worth paying attention to as they influence future Fed policy,” Cook said. “As the Fed gains confidence that inflation is under control and/or see signs that the job market is softening, that would make it more likely for the Fed to cut rates.”
Tariff deadline on the horizon
April 2 is looming as a key date for the global economy. That’s when Trump’s reciprocal tariffs are set to go into effect. These duties would see the U.S. match every tariff placed on its exported goods by every other country. If they go through, they could cause chaos across various industries, including the homebuilding sector.
A report this week in The Wall Street Journal indicated that the Trump administration has explored an alternative to the universal tariffs. The plan would separate other nations into three tiers and charged them different rates. But that option was reportedly scrapped in favor of an individualized approach to each trade partner.
“The president has made it clear he wants to see true reciprocity across the board from every one of our trading partners, and many ideas have been discussed on how to best achieve that outcome,” White House press secretary Karoline Leavitt told the outlet.
While tariffs and rising inflation could fuel job losses and a recession, a downturn might not spell doom for home sales. Odeta Kushi, deputy chief economist at First American Financial Corp., wrote earlier this week that the Fed typically responds to a slowing economy by lowering interest rates.
That could spur more homebuyers to come off the sidelines. But Santa-Donato cautioned that this could mean higher home prices if bidding wars become more common.
“The SEP confirms that the Fed sees a slower-growth economy ahead, but home prices won’t necessarily follow that same trajectory,” Santa-Donato said. “If rates do drop meaningfully, competition will pick up, and in a market with limited supply, affordability may not improve as much as buyers hope.
“Buyers hoping for affordability relief might be disappointed — lower rates won’t necessarily mean cheaper homes in this supply-constrained market.”
Powell acknowledged that recent surveys of households and businesses reveal a “significant rise in uncertainty.” Fed officials, he said, will need more time to see whether this pessimism translates to changes in consumer behavior.
“The relationship between survey data and actual economic activity hasn’t been very tight,” he said. “There have been plenty of times where people are saying very downbeat things about the economy and then going out and buying a new car. But we don’t know that that will be the case here.”
