The Federal Reserve on Wednesday cut the key interest rate by 50 basis points (bps) to a range of 4.75% to 5%, hitting an important cornerstone in the central bank’s fight against inflation. The cut is the first since March 2020, after the Fed raised interest rates to a 23-year high to cool the economy and curb inflation.
With both inflation and the labor market cooling taking place, economists and real estate professionals alike had expected the Fed to cut borrowing costs in September, with the big question being how big that cut would be.
In general the Federal Open Market Committee (FOMC) tends to raise or lower rates in 25 basis point increments, but they can move faster if they think their rate policy is misaligned with the risk balance. In 2022, the central bank raised interest rates in steps of 50 and 75 basis points to combat 40 years of high inflation.
“The Committee is committed to maximum employment and inflation of 2 percent over the longer term,” the FOMC said in a statement. “The Committee has become more confident that inflation is moving sustainably towards 2 percent and believes that the risks to achieving employment and inflation targets are approximately balanced. The economic outlook is uncertain and the Committee is alert to the risks to both sides of its dual mandate.”
The consumer price index – the Fed’s preferred inflation gauge – posted growth of 2.5% for the year ending in August, up from 9.1% in the summer of 2022. At the same time, the unemployment rate rose to 4.2%, up from from a recent low. point of 3.4% in April 2023.
Many market observers had reversed their expected cut from 25 basis points to 50 basis points, without any key data being released as a catalyst. Wednesday morning the CME Group‘s FedWatch tool found that 55% of traders expected officials to cut rates by 50 basis points, while 45% expected a smaller cut of 25 basis points. Less than a month ago, 71% of traders were leaning towards a 25 basis point rate cut.
The market will be closely watching the tone of Fed Chairman Jerome Powell’s press conference on Wednesday for clues about how quickly the Fed could cut rates later this year and into 2025.
Mortgage rates, which often correlate with the yield on ten-year government bonds, have fallen in recent months. Bee HousingWire‘s Mortgage Rates Center on Wednesday morning, the average rate for a 30-year conforming loan was 6.31%. That figure was 13 basis points lower than a week ago and 27 basis points lower than two weeks ago.
Eric Orenstein, senior director at Fitch Ratings, said in a statement.
“While not enough for a full-blown refi boom, an average 30-year rate of almost 6% does open up a meaningful portion of the market to refinancing. Mortgage lenders will benefit from this and are likely to be past the toughest times.”
“Given the expected rate cuts this week, the bond markets and 30-year mortgage rates have already responded, and rates have fallen significantly,” said Charles Goodwin, senior director of sales at Kiavi. “I believe we need to see rates fall further before the housing market really picks up.”
According to JP Kelly, senior vice president of mortgage at MeridianLinkWednesday’s interest rate cut will provide an immediate boost to the purchasing power of potential home buyers. But still high house prices and limited inventory available may not mean much in practical terms.
“Barring a housing boom to ease inventory constraints, rates will fall to around 5% [range] and undoing the lock-in effect is our best hope for driving real movement in the housing market,” Kelly said.
Keller Williams Chief economist Ruben Gonzalez also expressed caution in his expectations for near-term home sales.
“While rates may continue to decline as the Fed sets more direction on its future monetary policy, most of the mortgage rate adjustment appears to be already priced in,” Gonzalez said. “Home sales remained sluggish in August even with declining mortgage rates, suggesting buyers may still be cautious despite improved financing conditions.”
Editor’s note: This is a developing story and will be updated.
