On Wednesday afternoon at the conclusion of the latest Federal Open Market Committee (FOMC) meeting, the Federal Reserve voted to cut the Federal Funds rate by 25 basis points, bringing the current target range to 4.25% to 4.50%.
This latest reduction in rates marked the third consecutive rate cut, following November’s 25 basis point cut, and September’s half-point reduction in rates. In late July, the FOMC, for the eighth time, left the nominal interest rate unchanged, keeping it at a 23-year high of 5.50%.
“The FOMC cut its rate target by another 25 basis points as the market had anticipated,” said Mortgage Bankers Association (MBA) SVP and Chief Economist Mike Fratantoni. “However, while the cut was expected, and the statement was little changed, FOMC members’ projections regarding the future path for the federal funds rate moved up in the near term, and for their expectations for the longer-term neutral rate. The median member now expects that there will only be two cuts in 2025, and that the federal funds target will be 3% in the long run. MBA forecasts that the federal funds rate will only drop to 3.75% this cycle.”
The Fed’s most aggressive series of rate hikes in history ended in July 2023 when the committee held off on raising rates due to a litany of factors which consisted of 11 straight rate hikes over 15 months. Since the post-pandemic rate hikes began, the FOMC raised rates in March 2022 (+25 points), May 2022 (+50 points), June 2022 (+75 points), August 2022 (+75 points), September (+75 points), November 2022 (+75 points), December 2022 (+50 points), February 2023 (+50 points), March 2023 (+25 points), May 2023 (+25 points), June 2023 (+0 points), July (+25 points), September (+0 points), November (+0 points), December (+0 points), January 2024 (+0 points), March (+0 points), May (+0 points), and June (+0 points). This is equivalent to a rise of 5.00 percentage points in under two years.
“Inflation risks have kept treasury yields higher even with the Fed’s third consecutive rate cut, though mortgage originators will benefit from higher volumes in 2025 with nearly $2 trillion of outstanding mortgages above 6%,” said Eric Orenstein, Senior Director, Fitch Ratings.
With their latest move, the FOMC is viewing progress on cooling inflation that has stalled in recent months. The Fed also has witnessed increased consumer spending and growth in the gross domestic product (GDP) growth—signs pointing to the U.S. economy on more solid footing.
“Reduction in short-term rates is an important step towards aligning interest rates with the broader economy,” said National Housing Conference’s (NHC) President and CEO David M. Dworkin. “However, it is unlikely this is going to have a significant impact on mortgage rates in the near term. Ultimately investors must be more convinced that inflation is on a permanently downward trend before we see long-term rates come down as well. Until then, the cost of housing will remain too high, and unless we build more housing that is affordable to most Americans, it is going to stay that way.”
According to the official FOMC release, “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Voting against the action was Beth M. Hammack, who preferred to maintain the target range for the federal funds rate at 4-1/2 to 4-3/4 percent.
“In addition to the lone dissension, in the Fed’s summary of economic projections we saw a pull-back in the Fed’s expected cuts in 2025 and 2026 relative to their September projections,” added Realtor.com Chief Economist Danielle Hale. “The year-end policy rate is expected to be half a point higher in both 2025 and 2026. This underscores the Fed’s commitment to fully reigning in inflation back to the 2% target and also acknowledges the stickiness of prices in recent inflation trends. The Fed’s inflation expectations were revised modestly higher, while unemployment projections were revised modestly lower in 2024 and 2025, and growth projections adjusted higher in the same periods. I don’t expect to see a huge reaction from mortgage rates to this news because the market had largely already priced these expectations in. In short, the Fed’s current stance mirrors where the market had already moved.”
