There’s good news for consumers waiting for the cost of borrowing to come down: The Federal Reserve Bank announced a third interest rate cut today following its December 2024 board meeting.
Though most economists had anticipated another cut, Fed board chair Jerome Powell indicated it was a close call and that 2025 would see a more cautious approach.
Inflation and employment have been identified as the top priorities for the Fed, putting focus on the housing market on the back burner.
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Americans have eagerly awaited relief from exorbitant prices for consumer goods and housing, but it's not likely to come from the Fed. The board highlights its commitment to lowering inflation to its 2% year-end goal, but many doubt it will achieve that number anytime soon.
While consumer confidence typically surges following interest rate cuts, home buyers may see little relief on mortgage rates in the year ahead.
Powell has noted that interest rates are just a small piece of the housing market equation and that the federal government may need to play a more prominent role in reducing housing market bottlenecks.
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Inflation may not dip below 2% until 2027
Though inflation has been decreasing steadily since its peak in June 2022, it has begun to creep up again. This modest increase and the potential for inflammatory policies from the incoming Trump administration have reignited fears that the inflation rate could skyrocket again.
Following the announcement of the 0.25% interest rate cut, Powell noted, “Activity in the housing sector has been weak,” but he reiterated that “monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people.”
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This commitment to taming inflation and improving the labor market should raise wages enough to counteract the persistently high prices of goods and services.
However, Fed Governor Chris Waller likened curbing inflation to an MMA fight. He explained it’s like, “Getting inflation in a chokehold, waiting for it to tap out, yet it keeps slipping out of my grasp at the last minute.”
Members of the Fed interest rate-setting committee believe inflation will cool considerably, but it will take several years to reach that point. They predict that inflation will not dip below 2% until 2027.
While this is positive news, it may disappoint consumers who are worried about making ends meet in the meantime.
Housing market supply needs federal government intervention
Though the housing market is an integral part of the economy, it has become less of a priority for the Fed.
Though the housing market gridlock is ultimately caused by sellers locked into low mortgage rates and therefore being hesitant to sell, experts note that increasing housing supply is the most straightforward way to motivate buyers and reduce competition, independent of mortgage rates.
Related: Dave Ramsey has a warning for Americans buying a home now
During the September 2024 board meeting, Powell indicated that their fiscal approach only modestly impacts the housing market and that the federal government may need to boost the housing supply.
“The real issue with housing is that we have had, and are on track to continue to have, not enough housing,” he said. “It’s going to be challenging — where are we going to get the supply? This is not something that the Fed can really fix.”
“But as we normalize rates, you’ll see the housing market normalize,” he continued. “Ultimately, getting inflation broadly down and normalizing those rates is the best thing we can do for households. And then the supply question will have to be dealt with by the market and the government.”
Buyers will have to wait to see which supply-based housing policies the incoming Trump administration proposed will take hold in 2025.
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