Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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Analysts who had generally welcomed the Fed’s decision to leave interest rates unchanged in September are now debating whether policy makers will hit the pause button again when the Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, meets October 31-November 1.  Most are predicting that another rate hike is likely, perhaps not at the next meeting, but before the end of the year. 

Despite signs of progress in the Fed’s year-long battle to combat inflation, many Fed officials, including Fed Chair Jerome Powell, have said they think it would be premature to declare that battle won.  September’s much stronger-than-expected employment report , which came after the FOMC  meeting, supports that conclusion.

Employers added 336,000 jobs for the month while the unemployment rate remained unchanged at 3.8 percent. Wage gains slowed, however, providing a little counterweight to the generally robust labor report.    

Speaking after the September FOMC meeting, Powell told reporters:  “The fact that we’ve come this far lets us really proceed carefully.” Meeting minutes, also released at that time, indicated that 12 of the committee members favored boosting rates once more this year while  7 thought the successive hikes that have pushed rates to a 22-year high are sufficient.

Hitting the “Sweet Spot”

Although they appear to be divided on the key question – whether to hike rates again or not – Fed officials seem to be confident that they will be able hit their policy sweet spot, raising rates enough to curb inflation without pushing the economy into a recession.

There also appears to be a growing consensus among analysts that regardless of when (or whether) the Fed boosts rates again, when the current rate-hike cycle ends, rates will not fall as fast or as far as business executives and consumers might hope, and are not likely to return to anywhere near the pre-pandemic lows.   

That would not be good news for prospective homebuyers struggling with a combination of rising rates (now approaching 8 percent) and rising home prices that have created the least attractive affordability landscape in more than three decades.  ATTOM reported that median priced single family homes and condominiums were less affordable nationwide compared to historical averages in virtually all (99 percent) of the counties analyzed in its monthly survey. The National Association of Realtors (NAR) housing-affordability index fell to its lowest level in almost 38 years in June. 

Housing Struggling

"The dynamics influencing the U.S. housing market appear to continuously work against everyday Americans, potentially to the point where they could start to have a significant impact on home prices," Rob Barber, ATTOM’s CEO said in a press release.  "We clearly aren't there yet, as the market keeps going up and the slowdown we saw last year looks more and more like a temporary lull. But with basic homeownership now soaking up more than a third of average pay, the stage is set for some potential buyers to be priced out, which would reduce demand and the upward pressure on prices."

Barber was targeting what has been an unusual though understandable dynamic in the housing market:  Although affordability pressures have reduced the pool of prospective buyers, scarce inventories have fallen below even that reduced demand.  As a result, prices have continued to rise, even as home sales have declined. 

After slipping earlier this year, the closely watched Standard & Poors- Case Shiller national home price index has resumed its climb and now stands more than 1 percent above its year-ago level.  Ten of the 20 cities in the index sample reached all-time highs in July, pushing the composite index up by more than 5 percent year-over-year. That represents “the largest full calendar year increase in more than 35 years of data,”  Craig Lazzara, managing director at S&P, noted in his analysis of the survey.

Dianne Swonk, chief economist at KPMG, agreed.  The primary driver of rising prices, she noted, is the shortage of homes available for sale.  “Even in a market where demand has been hammered by higher rates, the supply just isn’t there,” she wrote in a recent analysis, adding,  “Short of a flood in supply, it’s hard to bring these prices down.”

Affordability Squeeze

Affordability constraints, which have hamstrung the market all year, continued to take a toll in August.  Existing home sales fell to an annualized rate of just over 4 million units, more than 15 percent below the year-ago level and 36 percent below the January 2022 pace. 

Pending sales meanwhile, an indicator of future transactions, continue to trend 10 percent to 15 percent below the year-ago level. The NAR calculated only 344,000 single-family homes under contract to close between now and year-end, suggesting that annualized sales may well fall below 4 million units this year.

 “The last time we went below four million was in the depths of the Great Financial Crisis between July and October 2010,” Odeta Kushi, chief economist for First American, told DS News. 

Rising mortgage rates and concern about the economic outlook, heightened by the continuing threat of a government shutdown, have led many would-be sellers to remain in place, keeping inventory levels down.  Although new listings increased modestly in August compared to the previous month,  they were still almost 8 percent lower than in August of 2022 and nearly 50 percent blow the same month in 2019. 

Inventory levels have also ticked upward recently according to Altos Research, which calculated 528,000 single-family homes available for sale the second week in August – almost 2 percent more than the previous week.  But it is lack of demand rather than increased supply that is driving the increase, which reflects “how homebuyers are reacting the highest mortgage rates in over two decades,” an Altos report points out. 

A broad view of current trends suggests that “modest relief from today’s record-high unaffordability is on the way,” Danielle Hale, chief economist for, believes  “But it will take time to unfold.”

In the meantime, “sales are struggling, home buyers are struggling,” Lawrence Yun, NAR’s chief economist, noted in a recent report.

With the Fed likely to raise rates at least once more and unlikely to lower them any time soon, those struggles are likely to continue well into next year.