Why the Fed Refuses To Give Homebuyers a Road Map for Interest Rates

A top official at the Federal Reserve has suggested the central bank should scale back the guidance it issues about future interest rates, echoing new Fed Chair Kevin Warsh's preference for a more taciturn approach.

Fed Gov. Chris Waller said he's skeptical of the Fed signaling its intentions on interest rates ahead of time. The Federal Open Market Committee sometimes telegraphs what moves it might make months ahead of time, especially regarding raising or lowering interest rates.

That leads to people trying to time the market, Waller said at a conference sponsored by the Bank of Italy on July 6. While forward guidance can speed up policy transmission, it can just as easily hinder the Fed's mission, he said.

"I continue to believe that forward guidance can be a valuable tool that has, at times, significantly strengthened policymaking and will continue to be useful," Waller said. "But forward guidance is more art than science, and there have been times when it has hindered, rather than helped, policymaking."

Because mortgage rates often move based on market predictions of future Fed interest rate moves, a more opaque Fed could introduce new uncertainty and volatility into mortgage markets. But homebuyers should already be wary of attempting to predict future rates or time the market, says Realtor.com® senior economist Jake Krimmel.

"For homebuyers, the risks from trying to time interest rate movements far outweigh the rewards," says Krimmel. "Finding the right lender and best offer is a much better use of time for homebuyers than trying to time up the Fed's moves and predicting how they might ripple through financial markets."

The 30-year fixed-rate mortgage now stands at 6.43%, according to Freddie Mac. That's up from 5.98% at the end of February.

President Donald Trump campaigned on a vow to get mortgage rates down. He also installed Warsh as Fed chair. Warsh is also supportive of lowering rates, but the FOMC has, as a body, remained more conservative.

Recent history lessons on guidance

In his speech, Waller pointed to recent instances where the Fed signaled an intent to change interest rates in the future. In late 2021, the Fed signaled it might tighten policy in the coming months, causing an immediate market reaction.

"The two-year Treasury yield rose nearly 200 basis points," Waller said. "That rise effectively shaved off about six months from the usual 12- to 24-month lag that one might conjecture would be needed to see the 200 basis points of actual tightening affect the economy."

The other case he cited came from September 2020. At that point, the Fed said it would hold off on rate increases until conditions improved. But that guidance created uncertainty when inflation picked up.

"In the end, this restrictive guidance tied the hands of the FOMC in 2021 and unnecessarily delayed rate increases," Waller said.

The Fed is currently facing an uncertain economy. In recent meetings, its members have been divided on how to act, given persistent inflation and concerns that fast-changing current events like the Iran conflict could change the economy.

At its most recent meeting, the FOMC voted to leave the federal funds rate unchanged in the range of 3.50% to 3.75%, where it has remained since December.

What does less guidance mean for homebuyers?

Krimmel says that forward guidance from the Fed "can be really useful when the Fed knows which way it wants to move and when it wants to influence economic conditions more quickly.

"But if the Fed's future path is more uncertain or if the economic landscape is shifting quickly, forward guidance might be ineffective or counterproductive," he adds. "It can box the Fed in, reduce its influence over the market, or make it more difficult for the market and the Fed to read one another's signals."

For homebuyers, Krimmel says the key takeaway is to focus more on their own finances rather than the likely path of interest rates.

"What homebuyers are better off doing to get a lower mortgage rate is to get their financial ducks in a row," he says. "Work to improve your credit score, try to save more to hit key down payment thresholds like 10% or 20%, and, crucially, shop around across different lenders."