FOMC Commentary from MBA's Mike Fratantoni

The following is MBA SVP and Chief Economist Mike Fratantoni’s commentary following the Federal Reserve’s FOMC statement released this afternoon on monetary policy and the economy:

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“To no surprise, the FOMC held rates steady at its January meeting. However, the statement did indicate some fairly significant changes to its statement regarding the expected direction of future policy, confirming that the next move will likely be a cut. While financial markets were expecting rapid cuts in the federal funds target this year, the statement pushes back on that expectation, saying, ‘The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.’

“Inflation is dropping faster than many had anticipated, and the job market thus far is holding up quite well. This combination should mean its next move will be a cut in order to prevent the real fed funds rate from becoming overly restrictive, thereby increasing the risk of a sharper economic slowdown.  We continue to expect a first cut at the May meeting, with three cuts in total this year.

“The statement also indicated that the Fed expects to continue trimming its balance sheet, allowing for the same pace of passive runoff of their Treasury and MBS holdings. This is despite the fact that some Fed officials have recently indicated a desire to begin to slow the pace of runoff.

“The combination of strong consumer demand and somewhat lower mortgage rates should support a more robust spring housing market this year.”