As expected, the Federal Reserve slowed the rate hikes in 2023 amid cooling inflation data, sparking hopes of a recovery for the housing market this year.

The Federal Open Market Committee (FOMC) on Wednesday afternoon decided to raise the federal funds rate by 25 basis points to the 4.50%-4.75% range.

The decision follows four subsequent 75 basis point increases, which occurred in June, July, September and November, and a 50 basis point increase in December.

The Fed started to hike rates in March 2022 in order to pull inflation back to the 2% target. Prices had increased significantly based on supply and demand imbalances related to the Covid-19 pandemic and Russia’s war against Ukraine.  

However, the Consumer Price Index (CPI) rose by 6.5% in December compared to one year ago, according to the Bureau of Labor Statistics — the latest sign that inflation is cooling. That’s the smallest 12-month increase in the index since the year ending in October 2021.

The housing market

With the Fed decelerating its rate increases, mortgage rates recently declined after reaching the 7% mark in October 2022. At HousingWire’s Mortgage Rates Center, the Optimal Blue data shows the 30-year fixed rate was at 6.16% on Tuesday, down four basis points from two weeks prior. 

But monetary policy observers are already looking ahead to try and understand what the Fed’s next steps may be — and the potential impacts on the housing market.  

According to Doug Duncan, senior vice president and chief economist at Fannie Mae, the Fed is going to hold the fed funds or sharp rates high until they are convinced they’ve expelled inflation. 

“But we think that rates will come down — primarily because of a recession,” Duncan said in an interview with HousingWire.  

Last April, Duncan and his team at Fannie Mae added an expectation to their forecasts of a recession in the first quarter of 2023 due to the Fed’s moves. And, their latest forecast ultimately included a 0.6% decline in the GDP for the year, as a soft landing seems plausible, according to the team. 

For the housing market, declining rates mean home price appreciation will remain slow. 

“Those things will improve affordability, allowing housing to take off because demand is still very strong relative to supply,” Duncan said. 

According to Fannie’s latest forecast, however, mortgage rates will still be at 6.1% at the end of 2023. However, Duncan said rates might go down even further to the high 5%. 

To George Ratiu, Realtor.com senior economist, the Fed is poised to continue pushing the funds rate higher this year in order to bring inflation near the 2% target. 

“For buyers and sellers, this signals additional adjustment in median prices in the months ahead,” Ratiu said in a statement. 

Nik Shah, CEO at Home.LLC., forecasts that the Fed will increase rates by 25 basis points in its February and March meetings. When rates achieve 4.75%-5%, three scenarios can happen. 

“If the Fed keeps hiking rates past 5%, we’ll see an equities correction and a housing market correction. If the Fed pauses hikes at 5%, the 30-year mortgage will keep on declining to around 5.80% – home prices will bottom and slowly start climbing again. If the Fed pivots and starts dropping rates, mortgage rates will decay even faster, and we’ll end 2023 with a 4% year over year appreciation in home prices,” Shah said.