Will Student Loan Payments and the Housing Market Be Impacted By the Latest Fed Rate Pause? Experts Weigh In

Mandatory Credit: Photo by JIM LO SCALZO/EPA-EFE/Shutterstock (14026544f)US Chair of the Federal Reserve Jerome Powell departs following a meeting of the Financial Stability Oversight Council to discuss an update on the council's Climate-related Financial Risk Committee and an update on the transition from the London Interbank Offered Rate (LIBOR) at the Treasury Department in Washington, DC USA, 28 July 2023.

As expected, the Federal Reserve paused its interest rate hikes for the second consecutive time, following 11 increases since March 22. The decision, viewed by many as a “wait and see” approach, is now leaving the door open for the December meeting. 

The Fed, in another unanimous decision, said it would maintain its funds rate at a range of 5.25% to 5.5%, a 22-year high, after its most recent two-day Federal Open Market Committee (FOMC) meeting on Oct. 31-Nov.1.

“To no one’s surprise the Fed did not hike rates today but have kept us in the dark as to their thinking for future meetings,”  said Ben Vaske, senior investment strategist, Orion Advisor Solutions

Interestingly, Fed officials said that “tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.”

“The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks,” according to the FOMC statement. 

At a post-meeting press conference, Chair Jerome Powell said that the Fed would continue to take its decisions “meeting by meeting” and that the committee is not yet confident inflation is where it needs to be. 

“We have not made any decisions about future meetings,” he added. 

Powell also said that “financial conditions have clearly tightened and over time it will have an effect.”

He added that the Fed can’t say how these would translate into potential further hikes. “We just don’t know how persistent it’s going to be and it’s tough to try to translate that” into potential further rate hikes are needed.

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The Fed Chair also added that they are not thinking about rate cuts at the moment.

The decision follows the latest set of inflation data, which came in hotter than anticipated, at 3.7% in September, according to the Consumer Price Index (CPI), released Oct. 12. And this is still a far cry from the Fed’s 2% target, another hike in December is not off the table. Yet, to also put this in context, a year ago, the index was standing at 8.2%.

According to Selma Hepp,  chief economist at CoreLogic, the Fed’s decision to hold interest rates steady comes as no surprise, though officials continue to remain very cautious and keep their options open for additional tightening. 

“The Federal Reserve is exercising caution while waiting for the jobs report on Friday [Nov.2], to see if the economy is finally showing signs of softening. Although the recent GDP reading was exceptionally strong, inflation has continued to drift toward the 2% FOMC target,” said Hepp. “But, bumps in the road remain as most recent wage growth data suggests that labor cost pressures persist, while elevated energy prices may seep into other components of inflation going forward.”

The sentiment is echoed by several experts who added that although we’ve had a few strong jobs numbers “it’s clear from state data and the types of jobs which are being hired that there’s softness creeping into U.S. labor markets.”

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“That, too, favors a wait-and-see approach,” said Peter C. Earle, economist, American Institute for Economic Research.

Yet, the seemingly cautious — and potentially short-lived — “hawkish” pause could be welcomed news for some segments of the population, namely, homebuyers and student loan borrowers. But to which extent remains to be seen. 

Impact on Student Loan Borrowers

The resumption of payments, which started Oct. 1 after a three-year hiatus, is hitting many Americans’ wallets. With the average monthly student loan payment at $503, according to the Education Data Initiative, a staggering 37% of federal student loan borrowers said they have not saved money in anticipation of resuming their payments, a Credit Karma survey found.

Charlie Wise, senior vice president of research and consulting at TransUnion, said that at a time when many consumers are already adjusting their household budgets with the resumption of student loan payments, the fact that the Fed is holding steady for now may at least begin to impart positive impacts to the credit markets. 

Another potential impact of the pause is that for borrowers with variable interest rates on their loans, it might mean they won’t see their interest rates climb for a period, which can provide some financial relief and make managing repayments more predictable, explained Andrew Latham, CFP and managing editor at Supermoney.com.

“On the other hand, the reasons behind a pause should also be taken into account,” he added. “If the pause was triggered by concerns about economic growth, student loan borrowers could face broader financial challenges, such as a tighter job market or lower wage growth, which could offset any benefits from stable interest rates.”

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According to Latham, it’s also worth noting that any relief from paused rate hikes might be temporary if the FOMC resumes rate increases later. 

“The economy is not doing half bad considering, so it is very possible the Fed will increase rates down the road if inflation does not continue to go in the direction it wants,” he said.  

He also noted that a drop in the rates is much less likely, so borrowers should ideally use this period to reassess their repayment strategies and perhaps consider refinancing options, emergency savings, or investment decisions that align with their long-term financial goals.

Impact on Homebuyers

Just earlier this month, the National Association of Home Builders, the Mortgage Bankers Association and the National Association of Realtors wrote a letter to the Fed and Chair Jerome Powell, voicing their concerns about further rate hikes and their impact on the housing market. 

The letter noted that the Fed’s rate path “has exacerbated housing affordability and created additional disruptions for a real estate market that is already straining to adjust to a dramatic pullback in both mortgage origination and home sale volume.”

Indeed, the combination of high prices, low inventory partly due to homeowners who’d rather stay put due to the low mortgages they secured a few years ago, and exploding mortgage rates are making the road to homeownership almost impossible for many Americans. 

Yet, TransUnion’s Wise noted that while the mortgage market will likely continue to be significantly less active than typical, some potential homebuyers who had been waiting for rate stability may enter, or at least consider entering into the home buying process.

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Indeed, as Danielle Hale, chief economist at Realtor.com explained, with longer-term rates climbing higher, mortgage rates have followed suit. 

“The widely watched Freddie Mac mortgage rate index hovers just below 8%, a threshold some other mortgage rate trackers have already exceeded,” said Hale. 

“The 23-year high in mortgage rates follows all-time lows reached just three years ago and highlights the effect that financing costs have on the housing market-a particularly rate sensitive sector of the economy.”

Hale further noted that the combined impact of higher rates and higher home prices has driven the cost of financing the typical listed home up more than $256 or 12.4% from a year ago according to Realtor.com September 2023 estimates, and up more than $1,170 from September 2020, doubling the cost in just three years. 

She also said that as she expects the Fed to keep the option for an additional future rate hike on the table, investors are likely to position cautiously, and the tendency for rates to remain steady to slightly higher remains. 

Other experts agreed, saying that the pause will not trigger significant changes in the housing market until the Fed’s next move is clarified. 

Astor Investment Management Chief Investment Officer John Eckstein said that there are two contending forces in the U.S. housing market today: insufficient housing stock leading to a backlog of demand for housing and high mortgage rates.

“Now that the Fed is pausing will this free the log jam? In the next several months 10-year government bond yields — and hence mortgage rates — are likely to be anchored around the average of their recent levels,” said Eckstein. 

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What Should You Expect From the Last FOMC Meeting of 2023? 

With the combination of inflation still being elevated and a very strong jobs market, it appears the Fed will keep rates higher for longer; and unless there are strong signals of an imminent recession, they likely won’t lower rates very much in the near future, according to Jason Obradovich, Chief Investment Officer at New American Funding.

He said that as a result of the strong jobs market, the Fed is avoiding any conversation around the need to lower rates at some point, which in turn will keep mortgage rates at these elevated levels for the next few months. 

“The only scenario I see that will push rates down is when we start to see the unemployment rate climb while inflation continues to fall at the same time,” he said. 

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