By Greg Heym, Brown Harris Stevens Chief Economist and host of Crossing The Line
Today, we cover the Fed's big move and present the latest on mortgage rates on our "For the Love of Money" edition of The Line. I bet you'll have that O'Jays classic song stuck in your head all day. I know I will.
The Fed Comes Out Swinging
The Federal Reserve cut its benchmark rate by 50 basis points; its first rate cut since 2020. In its statement on the rate cut the Fed mentioned that job gains had slowed, and inflation had made further progress towards its 2% goal. Basically, that means that they are worried about the recent slowdown in hiring, and feel they can cut rates by 0.50% since inflation has come down sharply over the past two years.
Remember that the Fed has a dual mandate; keep inflation at bay while maximizing employment. That means they can’t just cut rates to get the economy going again if that would stoke inflation. Sorry, but somebody has to be the adult in the room.
The Fed also released its Summary of Economic Projections, which forecasts the following additional rate cuts:
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50 basis points in 2024
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100 basis points in 2025
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50 basis points in 2026
Add those to this week’s cut, and you have a total rate reduction of 2.50%. Keep in mind this is just a forecast, and the Fed will always adjust its moves based on incoming economic data.
The Fed certainly made a lot of people happy Wednesday, but some of the euphoria may be premature, especially when it comes to mortgage rates. Why would I say such a thing? Well because:
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There is no direct correlation between the Fed’s actions and mortgage rates. The rate that the Fed is changing is an overnight lending rate, which will have a direct impact on rates for credit cards, auto loans, home equity lines of credit, and other short-term loans.
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30-Year mortgage rates are set based on future inflation expectations and tend to move in line with the yield on 10-year Treasuries.
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This is the first time since July 2023 the Fed has adjusted rates, and during that time mortgage rates have moved up and down a great deal. In fact, since the beginning of May mortgage rates have fallen 1%.
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What is most relevant to mortgage rates in today’s announcement is that the Fed expects inflation to continue to come down further over the next two years, which would bring mortgage rates lower.
Mortgage Rates Fall to 6.20%
The average 30-year mortgage rate fell to 6.09% this week, down from 6.20% the prior week, and the lowest reading since February of last year. Mortgage rates have been steadily declining since the beginning of May, falling 1.13% during that time. With inflation expected to continue declining in the coming months, we believe mortgage rates will follow.
Home sales have been slow the past few months, with existing home sales down 2.5% in August. Rising inventories combined with falling rates should lead to a pickup in activity in the coming months, although some buyers may try to wait for rates to fall further before they move. That could backfire if other buyers start buying now, which would reduce inventory and put upward pressure on prices.