Inman News
Job market is ‘solid,’ and central bank policymakers need time to assess Trump administration’s ‘substantial policy changes’ in areas including tariffs, immigration, taxation and regulations
Federal Reserve policymakers let a key short-term interest rate stand Wednesday and are no longer expected to start cutting rates in June due to uncertainties over the Trump administration’s “substantial policy changes” in areas including tariffs, immigration, taxation and regulation.
The central bank’s Federal Open Market Committee (FOMC) voted unanimously to keep the short-term federal funds rate at 4.25 percent to 4.5 percent, but to continue “quantitative tightening” at a scaled-back pace instituted in March that takes some pressure off of long-term interest rates.
At a press conference following the committee’s two-day meeting, Fed Chairman Jerome Powell said the job market remains “solid,” but tariffs threatened by the Trump administration could reignite inflation.
“The new administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy and regulation,” Powell said.
“The tariff increases announced so far have been significantly larger than anticipated,” he said. If sustained, “they are likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment.”
Yields on 10-year Treasury notes, a barometer for mortgage rates, were down by as much as 5 basis points after the central bank’s announcement, but rebounded as Powell fielded questions from the press. Data tracked by Mortgage News Daily showed rates on 30-year fixed-rate mortgages were down two basis points on Wednesday.
Futures markets tracked by the CME FedWatch tool showed investors are more certain than ever that the Fed will leave rates untouched again next month. Futures market bets on Wednesday implied an 80 percent chance that the Fed will let rates stand in June, up from 69 percent on Tuesday.
As recently as April 30, futures markets implied that the odds of a June rate cut were 67 percent.
“The committee’s declaration that ‘the risks of higher unemployment and higher inflation have risen’ provides a thinly-veiled critique of the new administration’s import tariffs and represents an assertion of independence,” Pantheon Macroeconomics Chief Economist Samuel Tombs said, in a note to clients. “For now, though, the FOMC sees these risks as evenly balanced, and wants to wait for more information before reducing the funds rate again.”
Between the Fed’s June 18 and July 30 meetings, consumer price index (CPI) reports for May and June will be released, providing “the first major opportunity to assess the scale of tariff-related price rises,” Tombs noted.
When they meet in July, Fed policymakers will also know if country-specific “reciprocal tariffs” that Trump put on hold for 90 days on April 9 have been implemented, Tombs said.
The Federal Open Market Committee started bringing short-term interest rates down in the final months of last year as the economy decelerated. After pausing to assess the impact of the three rate cuts approved last year, the Fed has been keeping a close eye on incoming data.
Risks to growth and the job market “will wind up being the bigger concern” than inflation this year, and the Fed will resume cutting rates in the second half of the year, Mortgage Bankers Association Chief Economist Mike Fratantoni predicted.
“Until then, the hard data on inflation and unemployment will continue to drive interest rates, including mortgage rates, from one end of a trading range to the other, with only a slight downward trend in mortgage rates over the remainder of 2025,” Fratantoni said in a statement.
‘Quantitative tightening’ relaxed
Fed policymakers announced in March that they would slow the pace at which the central bank unwinds Treasury notes from its books, from $25 billion a month to $5 billion a month starting in April.
The Fed issued an implementation note Wednesday saying the central bank will continue that more relaxed pace of “quantitative tightening.”
The Federal Reserve bought trillions in government debt and mortgages during the pandemic to bring interest rates down. The Fed’s cumulative Treasury and MBS holdings peaked at $8.5 trillion in May 2022, and since then, the central bank has trimmed $2 trillion in assets from its books.
When the Fed shifted gears and began quantitative tightening in 2022, it set a goal of trimming $60 million in Treasurys and $35 billion in mortgage-backed securities (MBS) from its balance sheet each month — a cumulative monthly reduction of $95 billion.
While the Fed would still like to reduce its mortgage holdings by $35 billion a month, it hasn’t been able to hit that target through passive rolloffs of maturing assets.
Because so few homeowners want to refinance at current rates, the Fed has only been able to trim its mortgage holdings by about $15 billion a month. So quantitative tightening has effectively been scaled back to $20 billion a month, less than one-fourth of the $95 billion goal in 2022.
Achieving the Fed’s $35-billion-a-month MBS rolloff target would require it to abandon its passive strategy and start selling mortgages. That would alarm real estate industry groups, who would like the Fed to publicly commit that it will not sell mortgages because of the risk that those sales would push mortgage rates higher.