Mortgage Rates Unlikely to Move Much After Fed’s Big Decision
The Federal Reserve (Fed) has made a significant decision to cut interest rates by 50 basis points (bps), a move that was more aggressive than some market participants had anticipated. This decision reflects the Fed's acknowledgment that current interest rates are too high given the recent decline in inflation and the uptick in unemployment. The Fed aims to act proactively to counteract a weakening economy. Fed Chair Powell emphasized that this decision is intended to maintain strength in the labor market through an appropriate recalibration of policy stance.
Despite this aggressive rate cut, the Fed's projections indicate a more gradual approach to future cuts. The Fed now anticipates a slower pace of 25 bps cuts moving forward, which is less aggressive than market expectations. Futures markets had priced in over 100 bps in cuts by the end of 2024 and 200 bps by mid-2025. However, the Fed's updated projections include 100 bps of cuts in 2024 and 200 bps by the end of 2025, suggesting a slower pace of rate reductions.
Mortgage rates are expected to remain relatively stable in the short term, despite the Fed's rate cut. Prior to the announcement, mortgage rates had already fallen from around 7.5% in mid-April to 6.1%. However, the market's expectation of a faster round of cuts may lead to slight increases in mortgage rates. The housing market has not yet responded significantly to the lower rates, with pending sales continuing to decline. This trend is unusual and indicates that more aggressive Fed action may be necessary to stimulate the housing market.
The Fed's decision to cut rates by 50 bps is seen as a corrective measure for not starting the rate cuts earlier, specifically at the July 31 meeting. Chair Powell, however, dismissed this interpretation during his press conference. The decision was closely contested, with one dissenting vote among the committee members, marking the first dissent since 2005.
The Fed's projections are subject to change based on incoming economic data. Chair Powell reiterated that the Fed could adjust the pace of rate cuts as needed. The goal is to avoid signaling a higher likelihood of recession, which could spook the markets. The housing market's response to lower rates is crucial for the Fed's objective of economic stabilization, given its sensitivity to interest rates.
Chen Zhao, who leads the economics team at Redfin, authored this analysis. Zhao has an extensive background in housing finance and financial markets research, having previously worked at JPMorgan Chase Institute and the US Census Bureau. Her expertise provides valuable insights into the implications of the Fed's decisions on the housing market and broader economy.
