With the labor market cooling, but still on solid footing, and the economy continuing to post solid growth, the Federal Reserve’s decision Wednesday to cut its benchmark interest rate by 50 basis points steers the country’s freighter of monetary policy into fairly uncharted waters.
“Our economy is strong overall,” Federal Reserve Chairman Jerome Powell began the press conference that concludes the Federal Open Market Committee’s (FOMC) monthly, two-day meeting.
By most analysts’ measures, the economy is not in trouble. Unemployment is not spiking. Inflation has continued to moderate — in everything but home prices and the cost of hair cuts. Continued easing will occur as Fed policymakers seek a neutral policy stance.
But, what target range entails neutrality? Are Powell’s labor concerns and inflation concerns roughly balanced?
A Focus On The Labor Market
“We are not on any pre-set course,” he noted, but the central bank’s first rate reduction since 2020 signals that maintaining strength in the labor market has at least achieved parity with policymakers' focus on driving down inflation.
Employment levels are at or near what the Fed sees as fulfilling its mandate of maximum employment, Powell explained, despite cooling in the labor market. Preventing further cooling underscores policymakers’ decision to start the rate-cutting cycle somewhat aggressively.
First American Senior Economist Sam Williamson projected that while “a 50-basis-point cut may be discussed during the meeting, it’s unlikely because the Fed wants to avoid conveying a sense of alarm or signaling they may be behind the curve in cutting rates.”
Asked whether a 50-basis-point cut implies the Fed waited too long to begin cutting rates, Powell replied, “I think you can take this as a sign of our commitment not to get behind.” He cited the unemployment rate, labor market participation levels, sustainable wage growth, and the ratio of job openings to unemployed people as the data reassuring policymakers’ decisions.
“The labor market is in solid condition,” Powell reminded the assembled reporters. “The economy is in solid condition.”
The Fed’s quarterly “dot plot,” updated today, provides a projection of where top Fed policymakers believe the benchmark federal funds rate is headed. All 19 participants suggested multiple cuts should occur before the end of 2024.
Federal Reserve Governor Michelle Bowman was the only Fed official to dissent on the decision to cut by 50 basis points today, instead of 25 basis points, and the first official to dissent on an interest-rate decision since 2005.
Impacts To The Mortgage Market
With the Fed in pursuit of neutrality, now, future easing is eagerly anticipated by a mortgage industry in pursuit of profitability.
“We are excited about the macroeconomic tailwinds provided to mortgage lenders by upcoming Fed monetary policy,” said Max Slyusarchuk, CEO of A&D Mortgage, “as demand for mortgage financing and refinancing increases into 2025.”
Improved affordability should loosen up the housing market, analysts project, but how far rates need to fall to attract buyers remains unclear; steadily falling mortgage rates in July and August did not translate to a boost in purchase loans.
“With additional rate cuts coming later this year, 2025 will see a housing market rebound in both existing and new home sales,” said Charles Williams, CEO of Percy.ai, a real estate market intelligence firm.
The Community Home Lenders of America (CHLA) also applauded the 50-basis-point cut. “Today’s interest rate cuts are critical in creating a more affordable housing environment, particularly for first-time and low-to moderate-income homebuyers,” said Scott Olson, executive director of the CHLA.
Today’s Fed decision “likely adds downward momentum for mortgage rates,” commented Eric Orenstein, senior director of non-bank financial institutions at Fitch Ratings, “which have already come down materially since May as Treasuries have rallied.” Before the Fed’s announcement, markets had priced in roughly a 40% chance of a 50-basis-point cut.
“While not enough for a full scale refi boom,” Orenstein added, “an average 30-year rate approaching 6% does open up a meaningful slice of the market for refinancing. Mortgage originators stand to benefit, and will likely find the toughest times already behind them.”
Sticky Housing Inflation Persists
Asked to comment on the feasibility of achieving 2% inflation with housing-sector inflation still elevated, Powell said he believes they will hit the 2% target. “The housing market is in-part frozen because of lock-in with low rates,” he explained. “As rates come down, people will start to move more.”
Powell continued, “The real issue with housing which we have had, and are on track to continue to have, is not enough housing.” Experts agree, easing borrowing costs have potential to expand demand absent added supply, under which conditions home price growth is unlikely to abate.
“I believe we need to see rates come down further before housing really picks up,” said Charles Goodwin, senior director of sales at Kiavi. “That being said, I do not expect any material negative pressure on home prices, as inventory is low and there’s enough buyer demand to keep prices stable.”
The impact of easing borrowing costs on consumers will not be immediately felt, as it takes time for the impact of changes to interest rates to materialize in consumers' lives.
"Today’s cut helps," said Silvio Tavares, president and CEO of VantageScore, "but it will take multiple cuts to have a noticeable impact on everyday finances.” He noted that while consumers "overall remain credit-healthy," many face mounting financial challenges "including rising delinquency rates and the highest credit card balances we’ve seen in more than four years."
John Paasonen, co-founder and CEO of Maxwell, a mortgage advisory and technology solutions provider serving small and mid-size lenders, believes the highlight of the Fed's rate cut is the spark of financial optimism it may give those beleaguered consumers.
"The big win here," he explained, "is less the actual mortgage rates (which hit a two-year low of 6.1% this week), but the consumer sentiment that rates are lower. In our current world, media plays a major role in how potential borrowers view the market. Headlines declaring a 'huge drop' could cause a significant segment to step off the sidelines and take action to buy or refinance."
