Investors who fund most mortgages have already factored in multiple rate cuts, so further decreases may hinge on the revelations of the upcoming “dot plot” regarding expectations for future rate cuts.
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The Federal Reserve is widely anticipated to initiate rate cuts next week, and new data indicating a slowing economy could prompt policymakers to make a decisive move.
This week, stocks saw widespread gains as investors adapted to the possibility of a 50-basis point rate cut by the Fed on Sept. 18, rather than a more cautious 25-basis point adjustment. A basis point equals one-hundredth of a percentage point.
However, investors who primarily finance mortgages have already factored in several Fed rate cuts for this year and the next. Whether mortgage rates will continue to decline may rely on the details of the forthcoming “dot plot,” reflecting policymakers’ outlook on the pace of future rate cuts.
The CME FedWatch tool, which monitors futures markets to assess investor sentiment on future Fed actions, now indicates a 45 percent probability of a 50-basis point cut on Sept. 18, up from 15 percent on Wednesday.
These shifts in futures markets followed the release of the Producer Price Index (PPI) and weekly initial unemployment claims on Thursday.
Both data releases on Thursday supported the notion that the recent decline in inflation may not be temporary, despite an unexpected surge in prices in August as reported in the latest Consumer Price Index (CPI) data.
The Fed’s preferred inflation indicator is the personal consumption expenditures (PCE) price index, which showed 2.5 percent annual growth in July, exceeding the Fed’s 2 percent target.
The impact of Thursday’s PPI report is significant as it will factor into the calculation of the August PCE price index, scheduled for release on Sept. 27.
Despite expectations of a modest rate cut next week, Pantheon Macroeconomics economists anticipate inflation to reach the Fed’s 2 percent target by the second quarter of 2025, enabling the Fed to pursue more aggressive easing as unemployment increases.
Jobless claims slightly rise
Thursday’s jobs report revealed a slight increase in initial jobless claims to 230,000 last week, still below July’s average of 240,000.
However, Pantheon economists attribute the higher claims in July to disruptions caused by Hurricane Beryl and an elevated number of auto plant shutdowns for retooling.
In addition, only 142,000 jobs were added last month, and Pantheon economists predict that employment growth will decelerate if tight credit conditions and a slowdown in household expenditure continue to impact hiring.
Mortgage rates declined throughout the summer
Data from Optimal Blue tracking rate locks indicates a decrease in rates for 30-year fixed-rate conforming mortgages since reaching a 2024 peak of 7.27 percent in April. Rates for these loans hit a new low of 6.10 percent this week.
Whether mortgage rates will continue to drop may depend on the “dot plot” revealing the Fed’s expected rate cuts in the coming months.
Futures market investors are betting on a reduction of at least 2.25 percentage points in short-term rates by mid-2025. Investors financing mortgages have already factored these expectations into the yields for mortgage-backed securities (MBS).
Pantheon forecasters anticipate a gradual rate cut next week but expect the Fed to aggressively lower short-term rates by a total of 2.75 percentage points by mid-2025.
While much of the anticipated rate cuts have been integrated into long-term rates, Pantheon predicts only a 58-basis point decrease in yields on 10-year Treasury notes over the same period, affecting mortgage rates.
With the narrowing “spread” between 10-year Treasury yields and 30-year fixed-rate mortgages, MBS investors are less concerned about prepayment risk, providing potential room for mortgage rates to decline further.
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