June 2024 Update

No surprise. Here we are at the highly anticipated FOMC’s June meeting, and the outcome is underwhelming. Despite last month's unexpected drop in inflation to 3.3%, the Federal Reserve is holding interest rates steady at the 5.25%-5.5% range until there is a clearer indication of slower economic growth. As of now, the Fed anticipates only one rate cut in 2024 to come in the 4^th quarter, contrary to the initial predictions earlier this year of three or more rate cuts. So, why is this stalemate happening?

To understand this, we need to delve deeper into the inflation issue, which remains a significant concern for economic policymakers. J.P. Morgan notes that the U.S. has maintained solid economic growth and a tight labor market while the inflation rate continues to fall towards the Fed's 2% target. This scenario reduces the risk of a recession, which is good news. However, even though inflation expectations for the coming year are trending down, predictions for the next three years are seeing a marginal uptick, suggesting that expectations and Fed policy in the second half of 2024 will be volatile and closely tied to releases of economic and inflation data.

Along with inflation, we need to look at the broader economic landscape, we see the economy has shown steady growth, as evidenced by the recent May Job Report, indicating strong job creation. However, the unemployment rate climbed to 4%, the highest it’s been in two years. To explain this paradoxical situation, a strong economy is luring more people back into the labor market, pointing to healthy economic expansion and a dynamic workforce.

What about mortgage rates? Well, mortgage rates are closely tied to prevailing interest rates, which remain stubbornly high. Predictions indicate mortgage rates will remain at or above 7% into the third quarter unless the Federal Reserve decides to cut interest rates. While there is some optimism for the future rate decline, the trajectory of mortgage rates largely hinges on the Federal Reserve's actions and broader economic conditions.

With all of this going on in the U.S., it is worthy to note that the European Central Bank cut their interest rates by 25 bps for the first time in five years, and it was the first time ever doing so before the U.S. This turned all eyes are on the Federal Reserve to see if they would follow suit, however, the Fed indicated it will not cut interest rates until there is clear evidence of slowing economic growth.

A long story short: The Fed feels inclined to hold interest rates higher for longer because of still elevated (although improving) inflation readings and a resilient labor market, meaning that for the remainder of 2024 baring an external shock, interest rates are unlikely to change much.