Fed Hits Pause on Easing as Inflation and Labor Risks Balance

The Federal Reserve paused its easing cycle at the January meeting of the Federal Open Market Committee. It held the short-term federal funds rate at a top rate of 3.75%, which is the level set in December. This is the first policy pause since the Fed resumed its easing in September.

The Fed’s January statement described the economy as being in solid health:

"Available indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, and the unemployment rate has shown some signs of stabilization. Inflation remains somewhat elevated."

It’s noteworthy that the January statement did not include a reference to a concern of higher risk from a weakening labor market, as was specified in December, according to NAHB Chief Economist Dr. Robert Dietz. 

There was little forward guidance in the statement, and there were two dissenting votes for a quarter-point cut. Both economists previously made the argument for more dovish monetary policy due to limited tariff effects and an improving outlook on productivity that would mute future inflation pressure. 

While reductions for the federal funds rate don’t have a direct effect on mortgage interest rates, they do lower interest rates on builder and developer loans, helping the supply-side of the housing market. Dr. Dietz reiterated that increasing the housing supply remains a key element to solving the ongoing housing affordability challenge. 

Read more about NAHB's rate-cut forecast from Dr. Dietz in this Eye on Housing post.