Borrowers who have been eyeing their debt balances and compounding interest with dismay got another reprieve on Wednesday when the Federal Reserve announced it would not hike rates in November.
The Federal Funds rate—the target interest rate range at which commercial banks borrow and lend their excess reserves to one another—now stands at 5.25 to 5.50%. That's up from a range of 3.75% to 4% in November 2022.
The decision wasn't much of a surprise: Markets and analysts were widely anticipating that the Federal Open Market Committee (FOMC) would skip another rate hike, as it did in September. "Multiple FOMC members have pointed out the progress they've already made," said Brian Henderson, BOK Financial® chief investment officer.
But that doesn't mean that rate hikes are behind us. Core inflation is still double the Fed's 2% target, and some analysts believe another increase could come as soon as December's meeting. Some measures—such as larger-than-expected new jobs numbers in September—could be taken as a sign that the economy hasn't cooled enough to bring inflation down further.
Labor market may still be too tight
"It's just one month, but when you see big months like that, the question becomes if the Fed has rates high enough," Henderson explained. "The Fed has stated that they think the Federal Funds rate is at a restrictive level, but some may ask, 'Then why isn't the job market slowing down?'"
At the same time, other data points are signaling that the labor market may be cooling, he continued. For instance, wage increases were only 0.2% for two months in a row, as of September, and now the ratio of job openings compared to the number of unemployed people looking for work is 1.5 (versus 2.0 at its peak in March 2022).
"The labor market remains very tight. The demand for workers is still very high. We need conditions where the supply and demand for workers is in better balance in order for inflation to reliably and sustainably be 2%," Henderson said.
Housing industry against further rate hikes
The housing industry has been arguing against additional rate hikes. In early October, the National Association of Home Builders, the Mortgage Bankers Association and the National Association of Realtors joined together to write Fed Chair Jerome Powell a letter urging the Fed not to consider further rate hikes.
The current rate-hiking cycle increased the Federal Funds rate by 5.25 to 5.50% in a little over a year. By doing so, it "has exacerbated housing affordability and created additional disruptions for a real estate market that is already straining to adjust to a dramatic pullback in both mortgage origination and home sale volume. These market challenges occur amidst a historic shortage of attainable housing," the letter reads.
As of late October, 30-year, fixed mortgage rates were at 7.9%, their highest level since September 2000, according to the Mortgage Bankers Association.
If the Fed keeps raising the Federal Funds rate, Treasury yields will keep going higher, taking mortgage rates with them. "While the Fed has been hiking rates, bond market yield keeps going higher and higher, particularly at the longer end, which also puts a brake on the economy," Henderson said.
Other factors to watch
Although the Fed focuses on core inflation, which excludes food and energy, the bond market trades more based on headline inflation, which includes food and energy. Gas prices have come down to where they were before the Israel-Hamas war began, but if the conflict spreads in the Middle East, that could raise prices again, which could impact both the bond market and consumer spending, Henderson said.
"It's not going to impact the Fed much, but in the bond market, it could really play out more."
As we move forward through November, one of the biggest factors that could keep rates where they are isn't directly tied to the economy. It's the potential for a federal government shutdown if Congress doesn't approve a deal to fund the government by Nov. 17.
"If the government hasn't reopened by the FOMC's meeting on Dec. 13, that's almost three to four weeks of shutdown and, for every week that the government shuts down, it will clip growth by 0.2%, so that's almost 0.8%," Henderson explained.
"It's temporary, though, because as soon as the government reopens, government workers receive backpay and you'll have kind of a snapback," he continued. "And so, while it's not that the Fed can't hike rates during a shutdown, it's doubtful that they would do it, depending on what else is going on at that time."