Mortgage Rates Unlikely to Move Much, Despite Fed’s Decision to Cut Big
On September 18, 2024, the Federal Reserve made a significant decision to cut interest rates by 50 basis points (bps), a move that was more aggressive than many market participants had anticipated. This decision was made in response to falling inflation and rising unemployment, signaling the Fed's willingness to take bold actions to preempt a weakening economy. Despite this substantial cut, mortgage rates are expected to remain relatively stable in the short term, as markets had already priced in aggressive rate cut expectations.
The Fed's decision to opt for a 50 bps cut over a smaller 25 bps cut reflects their acknowledgment that current interest rates are too high given the economic conditions. Fed Chair Powell emphasized that this decision was made to maintain strength in the labor market, although he dismissed the notion that the cut was compensating for a missed opportunity in July. The decision was not unanimous, marking the first dissent among voting committee members since 2005.
Looking ahead, the Fed's projections indicate a slower pace of rate cuts, with 25 bps cuts expected at each of the November and December meetings, totaling 100 bps of cuts in 2024. This is slower than market expectations, which had anticipated more than 100 bps in cuts by the end of 2024 and 200 bps by mid-2025. The Fed's projections also include 200 bps of cuts by the end of 2025, suggesting a gradual approach to rate reductions. Chair Powell reiterated that these projections are subject to change based on incoming economic data, and the Fed may adjust the pace of cuts as necessary.
In the housing market, mortgage rates had already fallen from around 7.5% in mid-April to 6.1% prior to the Fed's decision, in anticipation of rate cuts. Following the announcement, mortgage rates are expected to remain stable for the next few weeks but may experience volatility as markets react to upcoming economic data releases, such as the monthly jobs report. Despite the lower rates, the housing market has not yet shown signs of recovery, with pending sales continuing to decline. This unusual pattern suggests that homebuyers may be waiting for clearer signals from the Fed or that more aggressive action may be needed to stimulate the housing market.
The housing market's response to interest rate changes is crucial for the Fed's goal of economic stabilization, as it is one of the most interest-rate-sensitive sectors. The Fed may need to signal a faster return to neutral rates to encourage homebuyers and support the housing market's role in preventing further economic weakness.
