Patient Fed Signals No Rate Hike Coming Soon

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Citing that economic growth slowed in the fourth quarter, the Federal Open Market Committee (FOMC) voted in January to maintain the federal funds rate in the current target range of 2.25% to 2.5% and indicated that there will likely be no rate hikes in 2019.

In its statement, the FOMC cites that the labor market remains strong, with solid job gains and low unemployment. 

However, the committee notes that household spending and business fixed investment grew at a slower rate and that overall rate of inflation has decreased, largely as a result of lower energy prices.

However, inflation for items other than food and energy remains near the target of 2%.

“In light of global economic and financial developments and muted inflation pressures, the committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,” the statement reads.

The slowdown that began in the fourth quarter is expected to continue into the first quarter. Fannie Mae’s March economic outlook report forecasts that the economic growth in the first quarter will slow to 1.3%, in part due to consumer caution resulting from the market volatility that came in the fourth quarter.

Currently, Fannie Mae is forecasting 2.2% GDP growth in 2019 – down markedly from 2018’s 3.1%.

The expected deceleration in growth is largely attributable to the fading fiscal impact from the Tax Cuts and Jobs Act, as well as continued sluggishness in business investment and consumer spending, the company’s Economic and Strategic Research group says in the report.

The ESR Group forecasts that home sales will stabilize in 2019, with housing demand supported by a solid labor market and strong household formation.

Affordability is expected to improve as home price appreciation decelerates and mortgage rates remain stable.

“We expect headline growth in the first quarter of 2019 to fall to 1.3 percent annualized – the slowest quarterly growth in over three years,” says Doug Duncan, chief economist for Fannie Mae. “Growth is clearly on the decline, in line with our projection for 2.2 percent in 2019.

“As we weigh the downside risks to the economy – including moderating international growth and trade uncertainty – we now project that the Fed will wait until the fourth quarter to raise rates, if at all,” Duncan adds. “However, some ground may have been broken on a path to improved growth, as productivity rose by 1.8 percent annually last quarter – a clear step above the well-trodden 1.0 to 1.4 percent band of the last few years.”

Duncan adds that although Fannie Mae expects “another year of steady home sales in 2019,” lack of inventory “threatens to derail the spring home buying season.”

“Considering the general inventory shortage and strong demand for housing, affordability remains a key challenge facing the industry, particularly in the conforming space,” he says.

The last two rate hikes were in December and September.

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