What the December FOMC meeting statement said
The Federal Reserve’s Open Market Committee (FOMC), the rate-setting body that meets roughly eight times per year, voted to cut the Federal Funds rate by 25 basis points, bringing the current target range to 4.25% to 4.50% in a move that was widely expected.
This matched the size of November’s rate cut and was half as large as the 50 basis point cut made in September. Hiring rebounded in November, but the unemployment rate edged higher. Meanwhile, inflation also picked up. The Fed is navigating risks on both sides of its dual mandate and balancing these risks will be a key challenge. In fact, the rate cut decision had one dissenter, who preferred to keep the rate unchanged at this meeting.
Shifting expectations highlight a stronger economy, fewer rate cuts ahead
In addition to the lone dissension, in the Fed’s summary of economic projections we saw a pull-back in the Fed’s expected cuts in 2025 and 2026 relative to their September projections. The year-end policy rate is expected to be half a point higher in both 2025 and 2026. This underscores the Fed’s commitment to fully reigning in inflation back to the 2% target and also acknowledges the stickiness of prices in recent inflation trends. The Fed’s inflation expectations were revised modestly higher, while unemployment projections were revised modestly lower in 2024 and 2025, and growth projections adjusted higher in the same periods. I don’t expect to see a huge reaction from mortgage rates to this news because the market had largely already priced these expectations in. In short, the Fed’s current stance mirrors where the market had already moved.
Despite upticks, shelter inflation improved
Fortunately, despite upticks in the prices of some goods and services, shelter inflation decelerated in the latest data. Furthermore, falling rents, as expected in the Realtor.com 2025 housing forecast, will likely further that trend.
What this means for home buyers and sellers
A solid economic backdrop in the year ahead is expected to underpin the 2025 housing market, ushering in a bump in home sales and modest deceleration in home prices. That doesn’t mean that the housing market is without challenges. Buying a home still takes a larger share of your paycheck today than in recent history, but income growth in 2025 is expected to start to reverse that trend, and if home builders ramp up production, as expected, we will start to close the gap on the housing shortage that has long been a thorn in the side of homebuyers, especially first-time homebuyers.