“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the FOMC said in a statement announcing its decision. “The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.”
On Tuesday, UCLA forecasters issued a “recession watch” due to several factors. They noted that workforce reductions tied to increased deportations will result in labor shortages for sectors such as agriculture and construction.
The analysis also determined that tariffs will raise prices for a variety of goods and manufacturing inputs. And it noted the downstream effects of layoffs and restructuring efforts in the federal government.
During his customary post-announcement press conference, Fed Chair Jerome Powell acknowledged the potential for a recession. But he cautioned that this exists at all times and believes the odds are “still at relatively moderate levels.”
“There’s always an unconditional probability, possibility, of a recession. It might be broadly in the range of one in four at anytime, if you look back through the years,” he said. “It has moved up, but it’s not high.”
Peering into the crystal ball
In their summary of economic projections, Fed officials lowered their expectations for gross domestic product (GDP) growth. They anticipate GDP growth of 1.7% in 2025, down from an estimate of 2.1% in December.
They also upwardly revised their expectations for unemployment and their preferred measure of inflation, the core Personal Consumption Expenditures (PCE) index. The jobless rate is now expected to average 4.4% this year, with core PCE inflation (excluding volatile food and energy prices) averaging 2.8%.
Powell said that central bank forecasters are working to separate tariff-driven price increases from those that aren’t directly related to tariffs. He also called tariff-driven inflation “transitory,” which is why the majority of Fed officials are still projecting a pair of interest rate cuts this year.
A reporter pointed out that the FOMC forecast slower price growth during the COVID-19 pandemic, an expectation that never materialized as annualized inflation reached a 40-year peak of 9.1% in June 2022. Powell said today’s economy is a “different situation.”
“If there’s an inflationary impulse that’s going to go away on its own, it’s not the right policy to tighten policy, because by the time you have your effect, by design, you are lowering economic activity and employment. And if that’s not necessary, you don’t want to do it,“ Powell said.
Voxtur CEO Ryan Marshall said that “stubborn inflation” continues to impact American households on a daily basis. He indicated that the Fed’s job has gotten more difficult as it must weight the impacts of tariffs and is likely to keep interest rates higher for longer.
“That said, as the economy seems to continue its so-called ‘soft landing,’ we expect mortgage rates to drift lower through the summer gradually, but not by more than a percentage point,” Marshall said.
Fed vs. White House
Mortgage rates leveled off this week, although the average 30-year conforming loan is priced about 30 basis points lower than it was at the start of the year, according to HousingWire’s Mortgage Rates Center. Mortgage demand declined by 6.2% during the week ending March 14, according to data released Wednesday by the Mortgage Bankers Association (MBA).
HousingWire Lead Analyst Logan Mohtashami said earlier this month that the battle over interest rates is likely to heat up. Fed Chair Jerome Powell has sought to distance himself and other policymakers from political pressure as White House and Treasury officials push for lower rates to spur economic activity.
“If the economy tumbles into a recession, the opinions of the White House or Federal Reserve will take a back seat — the real drivers will be falling bond yields and mortgage rates,” Mohtashami wrote. “However, just how much they drop is mainly in the hands of the Fed, which controls about 65% to 75% of the shifts in the 10-year yield and mortgage rates.”
On Tuesday, Trump fired two Democratic committee members of the Federal Trade Commission (FTC). The FTC is designed to be an independent regulatory body and the moved sparked concerns that the Trump administration could go after other independent groups like the Fed.
In December, Powell said that he wasn’t concerned with the Fed losing its statutory independence. And on Wednesday, in response to a reporter’s question on the matter, he didn’t budge.
“I did answer that question in this very room some time ago. And I have no desire to change that answer and have nothing new for you on that today,” Powell said.
What will happen to home sales?
Odeta Kushi, deputy chief economist at First American Financial Corp., also acknowledged the rising risk of a recession. But she pumped the brakes on what a recession could mean for the housing market.
“A recession alone doesn’t necessarily lead to a housing downturn. The housing market’s performance depends on the causes of the recession and how the Fed responds,” Kushi said in written commentary.
“When the economy slows, the Fed typically lowers interest rates to stimulate growth. As a result, mortgage rates often decline, improving affordability and boosting house-buying power. This dynamic was clear in past recessions where rate cuts encouraged home sales. Even amid economic uncertainty, lower borrowing costs can make homeownership more attractive, offsetting some of the recession’s negative effects.”
First American predicted this week that existing-home sales for February would rise 1% from the prior month, which would also represent a 4.7% year-over-year increase.
Mortgage companies like Kiavi, a San Francisco-based private lender that caters to real estate investors, have their eyes on Fed policy as they attempt to gauge borrower demand.
“We expect some short-term volatility over the next six to nine months but anticipate the market will stabilize over the next 18 months as the Fed provides more clarity around its interest rate policy for the remainder of 2025,” Tim Lawlor, Kiavi’s chief financial officer, told HousingWire in written commentary.
Lawlor went on to note that tariff-driven increases in the costs of building materials, as well as the ongoing construction industry labor shortage, are impacting the strategies of real estate developers. While housing markets in previous hotbeds like Texas and Florida “are starting to soften,” he said, others in the Midwest and Northeast are performing relatively well.
“Real estate investors should also be cautious of the markets showcasing increasing days on the market for home sales. Real estate investing is based on a margin of safety: buy at the right price, have exit options, and stay in tune with local trends.”
