‘Elevated Uncertainty’ Prompts Fed to Hike Rates

Facing persistent inflationary pressures, the Federal Reserve unanimously decided at its September policy meeting to raise the federal funds rate to a target range of 3.75% to 4%.

In its post-meeting statement, the Federal Open Market Committee (FOMC) noted that “uncertainty remains elevated” due to “geopolitical developments” stemming from the war in Iran and widespread trade issues.

However, the FOMC slightly upgraded growth projections and stated that “economic activity is expanding at a solid pace.” Fed Chair Kevin Warsh had noted that the demand for capital has increased, leading to higher market interest rates.

The Fed’s decision is in response to inflation rising to a 3.4% year-over-year rate, well above its goal of 2%. The FOMC stated the rate hike will eventually help “deliver price stability.”

How the Federal Funds Rate Impacts Housing

While the central bank’s federal funds rate does not have a direct effect on mortgage rates, the rate hike does increase the cost of financing for builder acquisition, development and construction (AD&C) loans.

Higher borrowing costs make it more difficult to finance new construction, ultimately reducing the purchasing power of prospective buyers via higher construction costs.

Notably, the committee’s statement did not mention any changes to its plans regarding balance-sheet policy and asset reduction. This was positive news for home builders and mortgage rates, as an accelerated sell-off of mortgage-backed securities would push mortgage rates higher.

What Is the Outlook for Inflation and Interest Rates?

In his post-FOMC meeting recap, NAHB Chief Economist Robert Dietz wrote, “If higher energy prices begin to affect broader price-setting behavior and inflation expectations, waiting for conclusive evidence could leave the central bank with more work to do later.

“Additional constraints on oil products are a key concern whereby interest rates could move even higher,” Dietz noted.

NAHB is forecasting 2.1% real economic growth for 2026, and slightly more (2.4%) in 2027. And tempered labor market conditions are expected to keep the unemployment rate at or near 4.1% through the end of the year and well into 2027.

“[The current] outlook suggests an additional rate hike in December, with either flat conditions in 2027 or a combination of an additional hike and then an offsetting cut that year,” Dietz wrote. “These projections are conditional outlooks, rather than commitments.”

For more detailed analysis of projected inflation and the Fed’s monetary policy outlook, read Dietz’s full recap on Eye On Housing.