MBA economist and SVP predicts central bank will move rates lower before the end of the year
The Federal Reserve kept interest rates unchanged in yesterday’s decision but highlighted the risk of a jump in unemployment and inflation due to the ongoing trade war – and Mortgage Bankers Association (MBA) senior vice president and chief economist Mike Fratantoni believes rate cuts are still on the way in the second half of the year.
That decision to leave rates unaltered came despite a weak first-quarter GDP figure, which the Fed attributed to fluctuations in net exports rather than a slowdown in domestic demand.
And Fratantoni projected that potential damage to growth and employment may eventually outweigh inflation concerns. “MBA forecasts that the risks to growth and the job market will wind up being the bigger concern this year, which will lead the Fed to resume cutting short-term rates in the second half of the year,” he said in comments following the Fed’s announcement.
Fratantoni noted, “The FOMC held the federal funds rate target steady at its May meeting, dismissing the negative first-quarter GDP reading as solely due to volatility in international trade flows but noting that risks to its inflation and employment targets have increased given the heightened policy uncertainties.”
While acknowledging continued turbulence in mortgage rates, he expressed optimism about housing activity. “Purchase mortgage application volume continues to run ahead of last year’s pace, and MBA forecasts that will be true for the year as a whole, even with the rate volatility we have experienced,” he added.
His comments followed the Fed decision to keep its benchmark federal funds rate unchanged at a range of 4.25% to 4.5% on Wednesday.
“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the central bank said, though it acknowledged that “uncertainty about the economic outlook has increased further.”
The central bank emphasized its dual mandate of promoting maximum employment and stable prices, noting that the unemployment rate has stayed low in recent months and labor market conditions “remain solid.” However, inflation is still “somewhat elevated,” and the Fed warned that “risks of higher unemployment and higher inflation have risen.”
To navigate those challenges, the Committee reiterated its commitment to a 2% inflation target and indicated it would continue to monitor economic developments closely before making further policy moves. “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the statement said.
While holding rates steady, the Fed will continue reducing its balance sheet by shrinking holdings of Treasury securities and agency mortgage-backed assets, part of its ongoing effort to tighten financial conditions after the sharp inflation surge that followed the pandemic recovery.
All 12 voting members, including chair Jerome H. Powell and vice chair John C. Williams, supported the decision. Neel Kashkari voted as an alternate member.
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