Central bank policymakers drop short-term rates by 1/2 percentage point and signal more cuts ahead, but much of the impact may already be priced in to mortgage rates.
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After raising interest rates to the highest level in more than two decades to fight inflation, the Federal Reserve reversed course Wednesday and started with a bang — dropping the federal funds rate by half a percentage point and signaling that rates could come down by 2 percentage points by the end of next year.
Saying they have greater confidence that inflation is moving sustainably toward 2 percent — and that the “economic outlook is uncertain” — Fed policymakers set a target range for the federal funds rate at 4.75 percent to 5.0 percent.
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“The Fed has been assigned two goals: Maximum employment and stable prices,” Fed Chair Jerome Powell said of the decision. “We will remain committed to supporting maximum employment, bringing inflation down and keeping longer term inflation expectations well anchored. Our success in delivering on these goals matters to all Americans. We understand that our actions affect communities, families and businesses across the country.”
Federal Reserve Governor Michelle Bowman, who advocated for a 25 basis-point cut, voted against the move — marking the first time since 2005 the Fed has made a decision on rates that wasn’t unanimous.
In addition to lowering rates for the first time in 4 years to keep the economy humming, the Fed charted its expectations for future cuts in the “dot plot” accompanying the central bank’s latest summary of economic projections.
‘Dot plot’ shows expectations for future cuts
Source: Federal Reserve Summary of Economic Projections.
The dot plot showed Fed policymakers expect to bring rates down by another half a percentage point by the end of this year, to between 4.25 and 4.50 percent, with another full percentage of rate cuts potentially on deck next year.
By the end of the year, members of the Federal Open Market Committee see short-term rates coming down to between 3.25 and 3.5 percent — a two percentage point drop from today’s target range of 5.25 to 5.5 percent. But the dot plot is not a concrete plan for future cuts, which policymakers stressed will be data driven.
Economists at Pantheon Macroeconomics think Fed policymakers will ease more rapidly over the next nine months than envisaged in the latest dot plot. Pantheon’s latest forecast is for the target for the federal funds rate to come down to between 2.5 and 2.75 percent by June.
Samuel Tombs
The Fed “currently has too much faith in the ability of its easing measures to address the deteriorating trend in the labor market swiftly,” Pantheon Chief U.S. Economist Samuel Tombs said in a note to clients. “In reality, the rising unemployment rate is due to excessively tight policy several quarters ago, and any easing measures today will take at least a year to support the economy.”
The Fed had previously forecast its intentions to cut rates, and mortgage rates have been trending down since late April in anticipation of today’s move.
Bond market investors who fund most mortgage loans were demanding roughly the same yield on 10-year Treasurys following Wednesday’s rate cut as they were at Tuesday’s close — 3.64 percent.
As Powell fielded questions from reporters, 10-year Treasury yields were on the rise, and finished the day at 3.68 percent, up 4 basis points. A survey of lenders by Mortgage News Daily showed rates on 30-year fixed-rate loans rising by the same amount Wednesday.
That suggests today’s Fed move was already priced into mortgage rates.
Mike Fratantoni
“Market participants had been divided about how much the Fed would cut at its meeting today, so this decision is likely to spur some rate volatility as investors adjust to this expected path for monetary policy,” Mortgage Bankers Association Chief Economist Mike Fratantoni said, in a statement.
Mortgage rates fell all summer
Rate-lock data tracked by Optimal Blue shows that rates on 30-year fixed-rate conforming mortgages hit a new 2024 low of 6.03 percent Tuesday, down 1.24 percentage points from a 2024 high of 7.27 percent registered April 25.
“Mortgage rates likely had this cut – and this expected rate path – priced in, and lower mortgage rates, now close to 6 percent, have resulted in much more refinance and some additional purchase activity in recent weeks,” Fratantoni said. “We do expect that if mortgage rates remain near these levels, it will support a stronger than typical fall housing market and suggest that next spring could see a real rebound in activity.”
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