Fed leaves interest rates unchanged, but is no longer ‘patient’

by Andrew Morrell

The Federal Reserve announced June 19 that it would not make changes to targets for its key interest rate, the federal funds rate, which influences what banks charge for consumer loans including mortgages. However, in line with some projections, the Federal Open Market Committee made significant revisions to forecasts on future interest rate adjustments in response to new concerns that economic growth is slowing.

Most notably, eight of the FOMC’s 17 members said they anticipated authorizing a cut to the federal funds rate before the end of 2019, with all but one of that group predicting two cuts. Another eight said they did not yet see a need to increase or decrease rates this year. Only one FOMC member projected an interest rate hike at some point this year. The Fed’s median rate forecast for 2020 also moved lower compared to its previous policy statement in March, indicating that most FOMC members believe rates will be lower next year than they were this year.

Also of note to analysts and economists was the wording of the Fed’s perfunctory post-meeting policy statement. This brief statement on the reasoning behind the FOMC’s latest rate decisions is often nearly identical from one month to the next. But early reports on the release pointed out that it no longer said the Fed would be “patient” in its approach to interest rate decisions, a word that had been routinely included since January 2019. It also added that “uncertainties about [its] outlook have increased… In light of these uncertainties and muted inflation pressures, the committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

Even these seemingly minor details parsed from statements by Fed officials carry enormous weight in the economy, including the housing market. The federal funds rate is the primary tool used by the nation’s central bank to achieve its monetary policy goals, which include its “dual mandate” of keeping unemployment low and inflation steady. If the Fed decides to lower its target rate, as it is widely expected to do later this year, it will reduce the borrowing costs of banks which in turn will result in lower interest rates charged to consumers, whether that’s for a mortgage, an auto loan or a credit card balance. This is meant to stimulate the economy and head off a potential slowdown, although even the fear of such a slowdown occurring can exert its own effects on the economy through reduced hiring, spending and investment.

Despite becoming more transparent in recent years, it’s not always clear what exactly directors of the Fed are thinking. According to Mike Fratantoni, chief economist of the Mortgage Bankers Association, this latest statement from the Fed may produce more questions than answers, even from seasoned financial professionals.

“Markets are going to have a difficult time digesting these mixed messages, as it indicates that the Fed recognizes the slowdown, but is not yet committed to cut rates this year,” Fratantoni wrote following the policy statement.

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