Will they or won’t they?
For the third time this year, the question of whether the Federal Reserve will cut interest rates will be answered when the Federal Open Market Committee emerges from its two-day conclave Wednesday and issues its highly anticipated monetary policy statement.
Investors are overwhelmingly betting that the Fed will leave the benchmark federal funds rate unchanged at its current range of 4.25% to 4.5%. As of Tuesday afternoon, the futures market showed a 97% probability that the Fed will stand pat, according to fed funds futures prices tracked by the CME FedWatch tool. Those futures contracts currently predict that the Fed will likely wait until July to cut rates by 25 basis points.
Sam Williamson, senior economist at First American Financial Corp., used a bowling analogy to convey the difficult spot the Fed finds itself in as it tries to manage its dual mandate of maximum employment and stable prices.
“The Fed increasingly finds itself facing a challenge as formidable as converting an infamous 7-10 split as it grapples with inflationary risks of tariffs and a softening labor market spurring fears of a recession,” Williamson said in a statement provided to Scotsman Guide. “With inflation persistently running above the FOMC’s target and the labor market displaying resilience, the committee appears under little pressure to act, choosing instead to ‘wait for greater clarity’ on the impact of recently announced tariffs before easing monetary conditions.”
The “greater clarity” reference is a nod to Fed Chairman Jerome Powell’s April 16 speech at the Economic Club of Chicago, when he stated: “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”
Williamson also weighed in on the effect the Fed’s wait-and-see approach has had on mortgage rates, noting that “persistently high mortgage rates continue to dent affordability.”
“Over the past few weeks, mortgage rates have increased by 20 basis points, rising from approximately 6.6% to 6.8%,” Williamson said. “This increase is due to investor uncertainty over the impact of tariffs, which has boosted yields on the 10-year U.S. Treasury note, a benchmark that mortgage rates loosely follow.”
But the First American economist said that even if the Fed doesn’t cut rates this week, there is hope on the horizon for homebuyers. He noted that he expects more owners to put their homes on the market in the coming months despite a “higher-for-longer rate environment,” thereby “boosting inventory and setting off a virtuous cycle that, in turn, stimulates buyer interest and elevates sales.”
Williamson added: “With the Fed poised to resume rate cuts in the latter half of the year, mortgage rates are projected to ease from today’s levels, offering additional relief to prospective homebuyers.”
