When Will Interest Rates Drop? New Timeline as Housing Market Struggles

The U.S. Federal Reserve held interest at the current range of 5.25 to 5.5 percent on Wednesday as policymakers see progress in their fight to bring down inflation to target level but left themselves room to hike rates again this year should conditions demand it.

Fed chair Jerome Powell told reporters that the central bank was committed to bringing down inflation to the goal of 2 percent and that the full effect of interest raises that began in March of last year to a now 22-year high have yet to be fully felt in the economy giving policymakers the option of being careful.

The central bank projected that rates will hit 5.6 rate by the end of the year and will start to come down next year and hit just under 3 percent by 2026. The majority of policymakers—12 out of the 19—think there could be one more rate increase this year but others suggested they could stay put at the current range.

But in a slight surprise, officials projected the U.S. to grow by 2.1 percent this year, double their estimates from June. They suggested that core inflation, the rate that strips out the volatile energy and food prices, will hit 3.7 percent this year, start to fall in 2024, and hit the target range by 2026. Meanwhile, the unemployment rate was expected to rise slightly next year but stay within the 4 percent range in the next couple of years.

The projections bolster the view by some economists that the U.S. will hit a "soft landing" in 2024. This is the view that while the economy was expected to slow down due to high interest rates, the unemployment rate would stay relatively low as inflation moderated.

"Soft landing is a primary objective," Powell said. "That's what we've been trying to achieve."

He added that while inflation expectations appeared "well-anchored," the fight was not over.

"The process of getting inflation down to 2 percent has a long way to go," Powell added.

The Fed's policy moves have trickled down to the economy and have hit key economic sectors, such as the housing market, that are feeling the impact of high interest rates. Mortgage rates are hovering at a 20-year high of 7 percent, crowding out the ability of prospective buyers to own homes.

But Powell insisted that staying the course was crucial to bringing down prices; otherwise, they run the risk of inflation resurging.

"The worst thing we can do is fail to restore price stability," he said. "It can be a miserable period to have inflation constantly coming back and the Fed coming in and having to tighten again, again and again. The best thing we can do for everyone is to restore price stability."

The economic environment showed progress, Powell said, where the labor market is showing resilience without a huge jump in unemployment which was typical of past instances of high interest rates.

"What we have right now is what's still a very strong labor market that's coming back into balance. We are making progress on inflation. Growth is strong. Many, many forecasts called for growth to moderate over the course of next year. That's where we are," Powell said.

Some analysts suggested that the latest rate decision achieved the Fed's goal of a "hawkish pause", meaning that policymakers took a beat on their moves over the last year but also projected a willingness to take action when necessary.

But the economic projections offered a confusing message. Suggesting that the economy would run above potential with a low unemployment rate and that wages and inflation will cool belies the typical ways of economic forecasting, said Andrew Hollenhorst, Citigroup's chief U.S. economist.

"This is a difficult forecast to square with the reality of how economies behave," he told Bloomberg. "What the Fed did today made sense—that we are running strong growth, we are running inflation that's above target, it makes sense to guide for higher, for longer."