Fed Holds Rates Steady in June: What It Means for Mortgage Borrowers

In the just-released FOMC statement, the Fed kept the Fed funds rate unchanged. This continues to hold Fed funds in a range of 3.50% to 3.75%. Despite significant positive geopolitical developments, this was as expected by the market.

With the Memorandum of Understanding (MOU) between the US and Iran due to be signed on Friday and the price of oil falling, markets are entering a phase of watching how fast inflation numbers level off and begin to start dropping. During this transition, expectations for a rate hike will at some point be replaced with an expectation for the resumption of the rate normalization campaign (rate cuts) that got sidetracked by the outbreak of the Iran war. But I’m getting ahead of myself.

This is the fourth consecutive FOMC meeting without a rate cut. There is a refresh of dot plot projections released today (which will inform us about the status of the Fed’s rate hike expectations). And it is Chairman Warsh’s first meeting. By itself, that’s a lot of new information and new guidance for the market to take in and sort out for intermediate forward expectations.

As far as future rate cuts go, the post-war period only begins the cycle for a reversal of inflation. The Fed will need to see that inflection point before it considers resuming rate cuts. Meanwhile, the strength in the employment market and the resilience of the domestic economy have avoided the risk of going into a stagflation situation. And that’s good news for the Fed since future policy decisions won’t have to make decisions that conflict with one or the other of their dual control inflation and maintain full employment mandates.

For today at least, borrowers will not be hearing a message that rates are on their way down anytime soon. For mortgage financing, that will keep affordability front and center with purchase transaction activity.

What’s Next?

Markets will focus on Warsh’s press conference. This is his first official appearance to express the reforms he wants to make to how the Fed communicates and operates. The market is looking for how Warsh plans to reduce the transparency of forward guidance as well as plans to shrink the Fed’s balance sheet. Both of those have ramifications for how the market looks to the Fed as it trades bonds.

Also expect Warsh to be asked how the Fed will navigate the impact of geopolitical events and the upcoming economic data. Does he expect rate hikes in 2026 and into 2027, or will a continuing holding pattern suffice? Following that, what timing is expected before the Fed sees inflation turn back down? These questions may seem pedestrian compared to Warsh’s bigger goals, but it is important for us to understand, nonetheless.

Keep in mind, Fed funds rate cuts aren’t required for term mortgage rates to fall. And mortgage rates can fall without waiting to hear anything from the Fed. But the Fed’s guidance does influence the borrowing public’s expectations — not to mention market participants (investors and trading desks).

What Do Borrowers Do Now?

Originators should explain to borrowers looking to finance the purchase of a home that — even as term rates have remained elevated, and despite increases in available inventory — there remains a systemic shortage of homes that will take years to address. Finding a home and financing that purchase now still starts the opportunity to build equity.

With the news cycle centered on the Middle East and oil prices, the current mortgage rate market may take months to resume a downward trend. Sellers can offer to pay discount points, and originators can offer temporary buydowns for borrowers who have a purchase transaction opportunity.