In alignment with market expectations, the Federal Reserve just announced that their target rate would remain at 5.00 - 5.25%. The Federal Funds Rate affects the rate at which banks borrow from each other. By adjusting the rate, the Fed influences borrowing costs. Banks, in return, adjust their rates to consumers who save and borrow with them.
Core CPI continues to trend downwards from its previous peak of 6.6% year-over-year. As inflation declines, consumer purchasing power for goods and services increases, which could fuel additional spending within the economy.
The Fed remains concerned about elevated inflation. In its most recent May minutes, the Federal Open Market Committee agreed that inflation remains "unacceptably high." However, the minutes stated that the Committee would continue to monitor incoming inflation data for policy-making. Additionally, while core inflation and the Federal Funds Rate remain elevated, both rates remain well-below historical levels between 1970 and 2000.
Along with its rate announcement, the Fed released its Summary of Economic Projections, which surveys Federal Open Market Committee members' expectations of future monetary policy. The most recent median future target levels for the Federal Funds Rate show the Federal Funds Rate peaking in 2023 and declining in 2024 and 2025.
The median rate expectation increased by 0.5% for 2023 and 0.375% for 2024, with long-run figures remaining similar to previous expectations. These higher rate expectations point to potential future Fed Rate policy that could continue to raise the cost of borrowing for consumers.
Mortgage rates are indirectly related to the Fed Funds Rate. Future rate hikes could continue to constrain home affordability within a market with historically low inventory and household formation outpacing new construction, driving more households to the rental market.
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