Economic Developments - April 2024

Interest Rate Cuts Appear to Be on Hold, for Now

The Core CPI rose 3.8 percent on an annual basis in March, the third consecutive hot report. While some of the underlying details of the latest CPI report may not translate to the Fed's preferred core PCE measure of inflation, year-to-date data have failed to boost confidence that inflation is returning sustainably to the Fed's 2-percent target. Fed Governor Waller recently stated in a speech that there was "no rush" to cut rates given recent indicators, and Fed Chair Powell stated, "The recent data have not given us greater confidence, and instead indicate it's likely to take longer than expected to achieve that confidence." Since the start of April, financial markets' pricing has almost entirely removed the odds of a Fed rate cut by June. We now expect just two 25-basis point rate cuts to the fed funds rate this year, with the first occurring in September. Of course, there remains the possibility that there will be no rate cuts in 2024, but that is not our base case forecast. That said, longer duration yields have moved up sharply following the completion of our interest rate forecast. As of this writing, the 10-year Treasury yield is above 4.6 percent, reflecting the market's expectation of a higher-for-longer short-term interest rate environment. Similarly, the 30-year fixed mortgage rate appears poised to move back above 7 percent, as measured by Freddie Mac's weekly mortgage rate survey.

However, We're Still Anticipating Slower Economic Growth and Moderating Inflation

While payroll employment continues to surprise to the upside, rising by a strong 303,000 in March, we continue to see the current dynamic as only a matter of time before significant deceleration occurs. Business surveys, such as the National Federation of Independent Businesses (NFIB) and the Institute for Supply Management (ISM) Indices, have deviated more than what is typical in recent years from much of the hard data, but recent movements have shown a decline in hiring conditions and plans, suggesting employment growth is poised to slow. Additionally, recent payroll employment strength has disproportionately relied on public sector payrolls, with about 20 percent of all job gains since 2023 coming from the state and local government sector, compared to just 6 percent between 2017 and 2019. Given the slowdown in local and state tax receipt growth last year, we anticipate the pace of the recent government payrolls growth will likely slow by the second half of 2024, contributing to a broader slowdown in hiring.

More broadly for economic growth, recent strength in consumer spending has come at the expense of the personal saving rate dropping to new recent lows, as consumption growth has outpaced the rate of household income gains in recent months. The saving rate declined five-tenths to just 3.6 percent in February, compared to a pre-Covid average of around 7 percent. While strong gains in both the stock market and home prices in recent years would be expected to put downward pressure on the saving rate as households tap these sources of wealth, we see the current level of savings as being unsustainably low.  Household debt levels do not appear overly stretched relative to assets or incomes in the aggregate; however, the continued tightening in lending standards and higher interest rates will likely limit growth in debt-financed consumption growth. Some signs of stress are also evidenced by the latest auto and credit card delinquency data. We, therefore, continue to expect softening consumer spending growth, and more largely GDP growth, later this year.

One thing we, and the market, expect at the March Federal Open Market Committee (FOMC) meeting is some discussion of the policy regarding their balance sheet. The Chair noted at the last press conference that it would be a topic of discussion at the March meeting.

On the inflation front, once the time-lagged effects of heightened shelter inflation flow out of the measure over the course of this year, it will likely be difficult to sustain a heightened level of core inflation if wage pressures are easing. Most measures of nominal wage growth point to softening over the past year, though some remain at a level somewhat elevated from what would be consistent with a 2-percent inflation target. For example, the Atlanta Fed Wage Tracker, which seeks to control for job compositional shifts, shows wage growth to be 4.7 percent on an annual basis in its March reading. However, more timely business survey data and wage levels of job postings suggest further easing is in store back to a sustainable rate. Indeed.com's measure of job posting wage rates tends to lead the Atlanta Fed measure and, in this case, points to a softening of any wage-price related dynamics in the system. We see this as consistent with inflation trending downward towards the 2-percent target over our forecast horizon.

Home Price Growth Comes in Strong but Sales and Starts Likely to Take Breather

As measured by the Fannie Mae HPI, home prices rose 1.7 percent over the first quarter on a seasonally adjusted basis and were up 7.4 percent from a year prior. This was a modest acceleration from 6.6 percent annual growth in Q4 2023. We now project home prices to rise 4.8 percent on a Q4/Q4 basis in 2024 (we previously projected 3.2) and 1.5 percent in 2025 (previously 0.3 percent). However, even with this upgrade, we still anticipate decelerating price growth as the lack of affordability weighs on home purchase demand and the inventory of homes available for sale gradually increases.

While we believe home sales are likely to stay subdued in the near term, listings of homes for sale have been trending upward in recent months and have outpaced sales. The growth in listings is consistent with recent trends in the Fannie Mae Home Purchase Sentiment Index® showing improved sentiment around home-selling conditions. However, given the ongoing affordability challenges and elevated mortgage rates, this growth in listings is not translating into a one-for-one increase in sales. We expect listings will continue to outpace sales as the year progresses, leading to a gradual loosening of inventory and decelerating home price growth.

New single-family construction continues to be strong, though the relatively slower pace of new home sales points to some softening in the near term. Single-family housing starts fell sharply by 12.4 percent in March, and we are expecting some comparative softness next quarter as the starts to new home sales ratio comes into a more typical alignment. However, over the longer term, the continued tight existing sales market is expected to be supportive of new home sales over the coming years.

Economic & Strategic Research (ESR) Group
April 16, 2024
For a snapshot of macroeconomic and housing data between the monthly forecasts, please read ESR's Economic and Housing Weekly Notes.

Data sources for charts: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, Indeed.com, National Association of REALTORS, Federal Reserve, Atlanta Federal Reserve, Freddie Mac, Fannie Mae

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic & Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.