The Federal Reserve reduced the target range for the key, short-term federal funds rate by 25 basis points to a top rate of 1.75% at the conclusion of its October Federal Open Market Committee (FOMC) meeting. This was the third cut in 2019, almost fully reversing a set of increases enacted in 2018. The FOMC views these enacted reductions as part of a mid-cycle (mid-late-cycle may be more accurate) adjustment to ensure economic growth continues. There were two dissenting votes with this decision, with eight in support.
A reading of the changes in the Fed statement (removal of the phrase act as appropriate “to sustain the expansion”) suggests that interest rate cuts are now on pause for the remainder of 2019. Nonetheless, the more dovish 2019 stance of the Fed is good for housing and home building, as forecasts for slow growth continue to be a headwind for additional construction expansion, particularly after the housing affordability crunch of 2018.
The Fed characterized the labor market as “strong,” with economic activity rising at a “moderate” rate. This mirrors the home building economic perspective of a decent economic growth, ongoing labor shortages, and late cycle concerns over housing affordability. The Fed noted that “business fixed investment and exports remain weak,” which matches local housing market weakness seen in some parts of the U.S, such as a manufacturing-intensive areas. Household spending was described as rising at a “strong pace.”
Inflation was characterized by the Fed as “running below 2 percent” (its symmetric target), justifying this rate reduction in order to support full employment and price stability. Indeed, it is tame inflation readings that are supporting the ongoing dovish policy moves.
The evolution of Federal Reserve monetary policy over the last year is an important reason why mortgage interest rates have declined from late-2018 cycle highs. Given that the housing market faced a 10-year low for housing affordability last Fall, the Fed’s approach is a net positive for future housing demand and home construction, while offering a small offset for rising construction costs. These costs are limiting housing inventory, particularly at the entry-level market. Moreover, higher production costs and other market limiting factors have caused housing affordability to decline in recent years and are the primary driver for NAHB’s estimate for generally flat conditions for residential construction over the near-term.