The Federal Reserve badge against a backdrop of hundred-dollar bills.
Lanette Behiry/Real Estate News

No rate hikes (yet) as Fed shakes off mortgage ‘lock-in’ effect 

The Fed did not boost interest rates at its September meeting but warned that one more hike is likely this year.

September 20, 2023
3 minutes

Key points:

  • Federal Reserve Chair Powell said that the GDP has been stronger than expected, though some economic sectors are lagging.
  • When asked about housing supply and costs, Powell suggested that rent growth has slowed — or even reversed — for some renters.
  • He acknowledged that homeowners’ locked-in low rates are holding back supply, but said that doesn’t play a role in the Fed’s decision making.

In line with analysts' expectations, the Fed chose to pause rate hikes for September, but Chair Jerome Powell warned that the Federal Reserve Board is "prepared to raise rates further if appropriate," and suggested there is a high likelihood of one more rate hike before the end of 2023. 

Powell conceded that inflation has come down for goods and housing services, but prices remain high, and the economy still "has a long way to go" until inflation is back down to the targeted 2% goal. Additionally, he highlighted some sectors, including housing, as areas that could still improve.

"Recent indicators suggest that economic activity has been expanding at a solid pace, and so far this year, growth in real GDP has come in above expectations," he said. "Activity in the housing sector has picked up somewhat, though it remains well below levels of a year ago, largely reflecting higher mortgage rates." 

Rent prices coming down

When asked during the question and answer session about low home supply and its effect on housing costs and inflation, Powell acknowledged that supply is "structurally constrained" but suggested that rent growth has slowed — or even reversed — in the last year. 

"In terms of where inflation is going in the near-term, a lot of it is leases that are running off and being re-signed — or released — at a level that won't be that much higher. A year ago it would have been much higher than it was a year before," he said. "Now it may be below or at the same level. As those leases are rolling over, we're seeing what we expect, which is measured housing services inflation coming down."

Still, affordability remains a challenge in many markets. While there are hundreds of thousands of new homes in the construction pipeline, homebuilder confidence has become more shaky in recent months due to high borrowing costs and mortgage rates.

The mortgage rate lock-in effect

The massive number of existing homeowners locked into record-low rates has been cited as a primary reason for low inventory and an unbalanced market. When asked if the Fed would ever consider dropping rates to record lows again to prevent another "lock-in" cycle, Powell said it was unlikely.

"Will that play a role in our future decisions … about whether we would cut rates? No, I don't think it would," he said. "I think we'd be looking fundamentally at what rates does the economy need. In an emergency like the pandemic or during the global financial crisis … you have to do what you can to support the economy."

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