The Federal Reserve has made a significant move by lowering its benchmark interest rate by 50 basis points to a range of 4.75% to 5%, marking a key development in the central bank’s efforts to combat inflation. This rate cut, the first since March 2020, comes after a period where interest rates were raised to a 23-year high to control the economy and inflation.
With inflation and the labor market showing signs of cooling, experts in economics and housing had anticipated a rate cut from the Fed in September. The main question was the magnitude of the cut.
Typically, the Federal Open Market Committee (FOMC) adjusts interest rates in increments of 25 bps, but they can act more swiftly when they feel their current stance on rates is not in line with the risks. In 2022, the central bank raised rates by 50 and 75 bps to combat high inflation levels not seen in 40 years.
The FOMC stated, “The Committee aims to achieve maximum employment and inflation at a rate of 2 percent in the long run. It has become more confident that inflation is moving steadily towards 2 percent and believes that the risks to achieving its goals for employment and inflation are roughly balanced. The economic outlook is uncertain, and the Committee is monitoring risks on both sides of its dual mandate.”
The Consumer Price Index, the Fed’s preferred measure of inflation, showed growth of 2.5% for the year ending in August, down from 9.1% in the summer of 2022. Meanwhile, the unemployment rate increased to 4.2%, up from a recent low of 3.4% in April 2023.
Many traders had adjusted their expectations for a rate cut from 25 bps to 50 bps without any major data release triggering the change. On Wednesday morning, the CME Group‘s FedWatch tool indicated that 55% of traders anticipated a 50 bps rate cut while 45% predicted a smaller 25 bps cut. Less than a month ago, 71% of traders leaned towards a 25 bps rate cut.
Observers will closely monitor Fed Chair Jerome Powell’s news conference for insights into the pace of future rate cuts in 2025. Mortgage rates, which are often linked to the 10-year Treasury yield, have been declining in recent months.
According to Eric Orenstein, senior director at Fitch Ratings, the Fed’s 50 bps rate cut is likely to further reduce mortgage rates, which have already fallen significantly since May. This could potentially lead to increased refinancing opportunities for mortgage originators.
Experts like Charles Goodwin, senior director of sales at Kiavi, believe that housing market activity may pick up further if rates continue to decrease. However, high home prices and limited inventory remain challenges.
JP Kelly, senior vice president of mortgage at MeridianLink, sees the rate cut boosting purchasing power for homebuyers but acknowledges that other factors like inventory shortages need to be addressed for significant movement in the housing market.
Keller Williams chief economist Ruben Gonzalez also maintains a cautious outlook on home sales in the near future, noting that despite declining mortgage rates, buyers may still be hesitant.
Editor’s note: This is an evolving story and will be continuously updated.
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