The Federal Reserve (Fed) raised the federal funds rate 25 basis points to the 5.25 to 5.5% range on Wednesday, its highest level in 22 years.

While the markets have already “priced in” this rate hike, which was widely expected, most investors are already wondering what it would take for the central bank to lift rates again later this year. For the housing market, that likely means a few more months with mortgage rates above 6%.

The Federal Open Markets Committee (FOMC) elected to resume its rate hikes in July in spite of recent positive inflation and labor market readings. Prices increased more slowly in June and hiring reverted back to a more gradual pace.

However, both inflation and unemployment are still running hotter than expected in an economy at full employment with stable price growth, prompting the Fed to tighten further.

“The Committee will continue to assess additional information and its implications for monetary policy,” the FOMC said in a statement. “In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

The FOMC also said it would continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities.

During a press conference with reporters on Wednesday, Fed Chair Jerome Powell said another rate hike in September is “certainly possible,” but so is a pause. He noted that the financial policymakers have two inflation reports, two job reports and other economic data before a decision has to be made.They want to remain data dependent. 

“As I have stated for a long time, the Fed wants to attack the labor market and thinks job openings are too high and jobless claims too low,” said HousingWire’s Lead Analyst Logan Mohtashami. “Certain Fed members don’t believe we have made progress on inflation. I wonder what’s in their coffee each morning. And some Fed members are saying progress is being made. Also, the Fed doesn’t know why people won’t list their homes. I am assuming that the Fed believed when mortgage rates stabilized that inventory channels would look normal, but they forgot that educated working people don’t sell their homes to the homeless. The majority sell to buy another one, so this concept I am hoping is finally hitting home with them.” 

Inflation fell to 3% in June, down significantly from where it was a year ago but still higher than the 2% threshold. Core inflation—which excludes food and energy costs—rose 4.8% in June. Raising interest rates is designed to tackle those still-high prices outside of the volatile food and energy sectors.

The problem is that housing costs, which account for a large share of the inflation picture, are not coming down meaningfully in the CPI. In June, the index for shelter accounted for 70% of the increase in the CPI. Rents were up 8.3% in June, while owner costs rose 7.8%.

Unfortunately, the Fed does not have the right tools to tackle high housing costs in the U.S., Bright MLS Chief Economist Lisa Sturtevant noted two weeks ago. Initially, higher rates did cool housing demand. But because rates had been pushed so low by the Fed during the pandemic and then increased so quickly, the Federal Reserve’s rate increases not only reduced housing demand—as intended—but also severely limited supply by locking homeowners into homes they would have otherwise listed for sale. Few Americans can or want to move when there’s such limited inventory, home prices remain near record highs, and mortgage rates are touching 7%. 

The recent slowdown in inflation makes it hard for central bank officials to firm up plans for any additional rate increase. Officials didn’t release quarterly interest-rate and economic projections after their two-day meeting this week.

What’s next?

Most Fed officials in June had penciled in two more rate rises this year – in July and once more in the fall. As a result, investors were listening carefully to Powell’s press conference on Wednesday to decipher whether a rate increase will be likely at the September 19-20 meeting. 

But Powell wasn’t showing his cards much. While he noted that a soft June inflation report was “welcome,” it was only one month of data and the Fed needs to see more from the “whole collection of data” before making a determination in September. He wouldn’t entertain a timeline for cutting rates, either, but said it was very unlikely to happen this year.

“We’ll be comfortable cutting rates when we’re comfortable cutting rates,” he told reporters.

Powell also sidestepped questions from reporters about what would prompt them to raise rates again in September or hold them steady.

“We’ve seen so far the beginnings of desinflation without any real cost in the labor market, that’s a really good thing. Historical records suggest that it’s very likely to see some softening in the labor market conditions, which is consistent with a soft landing,” said Powell. However, he refused to use the term “optimism.” Instead he said “there’s a pathway” to talk about the future of the American economy.

“We’re going to be going meeting by meeting, and as we go into each meeting, we’ll be asking ourselves the same question. We haven’t made any decision about any future meeting, including the pace at which we’d consider hiking. We’re going to be assessing the need for further tightening that may be appropriate,” said Powell.

After one reporter asked about a timeline for the housing market to balance itself out, Powell responded by saying that we are still living in the aftermath of the pandemic, which has left us with an asymmetrical market. 

“I think we have ways to go to get back to balance. With existing homes, many people who have low rate mortgages don’t want to sell their home because they have so much value in their mortgage. It means that supply of existing homes is really really tight, which is keeping prices up. On the other hand, there is a lot of supply coming on right now. A lot of the buyers are first time buyers who have accepted the relatively elevated mortgage rates. Overall, it will take some time before it balances out.”

Powell warned last month that he wouldn’t shy away from raising rates at consecutive policy meetings. He also said moving rates up at a slower, quarterly pace could be expected to continue if the economy evolves in line with current expectations.

The CME FedWatch Tool showed a 98.9% chance the Fed would raise rates to the 5.25 to 5.5% range on Wednesday morning, according to interest rate traders. However, 79.2% of these investors bet officials will freeze the rate hike at the September 20 meeting. 

Ahead of the Fed meeting, mortgage applications fell last week, recording the lowest index of purchase applications in over a month.  

On Tuesday afternoon, mortgage rates for 30-year fixed-rate mortgages were at 6.87%, according to HousingWire‘s Mortgage Rates Center. However, at Mortgage News Daily, mortgage rates were higher, at 7.04%.

The mortgage market, which will likely see another uptick in interest rates, may continue to be slow, predicts Michele Raneri, vice president and head of U.S. research and consulting at TransUnion.

“Many consumers could still hold off on making a home purchase in hopes that interest rates stabilize and eventually come down,” said Raneri.

One concern that lives among economists is that the Federal Reserve won’t be able to bring down home prices and rents by raising rates further, at least not without doing significant damage to the economy. More supply seems to be the only solution, several housing economists said.  

“The Fed is now stuck in a place where they are committed to 2% inflation and where the only tool they have will not be able to move the needle because it cannot address the housing supply-demand imbalance without seriously hurting consumers,” said Bright MLS’s Sturtevant.

“But they can’t back down because they have consistently and loudly said they will not stop until they reach 2% and backing down would make it harder for investors, businesses, and consumers to believe it when they lay down the law next time.”  

Some economists talk about a “pause mindset,” which should help shrink the spread between the 10-year treasury and 30-Year fixed-rate mortgage, providing relief after a spring of skyrocketing rates. 

“However, we will still see tension in the short term,” said Dan Burnett, Head of Investor Strategy at Hometap Equity Partners.

Meanwhile, borrowing costs will likely remain elevated through the remainder of 2023. 

“Buyers can expect to continue seeing mortgage rates above 6%, although, with 11 months of rates in that range, many home shoppers have adjusted their budgets to the new reality. The silver lining for many buyers wondering about the trajectory of housing markets is that seasonality is returning, pointing to expectations of better values during the fall and winter months,” said  George Ratiu, chief economist at Keeping Current Matters.

Editor’s note: This story was updated at 3:56 p.m. EST to include comments from Powell.