Fed cuts rates again: Will mortgage costs finally drop?

The Federal Reserve lowered its key interest rate by a quarter percentage point on December 18, 2024. This marks the third consecutive reduction, bringing the overnight borrowing rate down to a target range of 4.25%-4.50%. The decision comes amid steady inflation and solid economic growth, signaling a recalibration of the Fed’s monetary policy.

The Federal Open Market Committee’s decision followed earlier cuts in September (50 basis points) and November (25 basis points), cumulatively bringing rates down by a full percentage point since September. While the rate cut is intended to stimulate economic activity by making borrowing cheaper, Chair Jerome Powell noted that the Fed is now in a more cautious stance. He stated, “With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive.” Powell highlighted the need for careful assessment moving forward, given that inflation remains above the Fed’s 2% target.

Despite the cut, the Fed indicated it might only push rates lower twice more in 2025, with further cuts expected into 2026 and 2027. The projected long-term neutral funds rate has drifted up to 3%, reflecting a slight revision from previous estimates. Moreover, the committee raised its projection for full-year 2024 gross domestic product growth to 2.5%, half a percentage point higher than previous forecasts, but anticipates a slowdown to 1.8% in subsequent years.

• The job market remains relatively stable, with the unemployment rate estimated to decrease to 4.2% this year.
• In contrast, inflation estimates for both headline and core measures have been adjusted upwards to 2.4% and 2.8%, respectively, thus reinforcing concerns over persistent inflationary pressures.
• The decision to cut rates occurs even as the economy is projected to grow at a 3.2% rate in the fourth quarter, indicating a divergence between traditional macroeconomic indicators and monetary policy actions.

The market reaction to the Fed’s announcement was swift, with the Dow Jones Industrial Average dropping more than 1,100 points and Treasury yields rising sharply. This volatility suggests skepticism among investors regarding the Fed’s ability to further reduce rates. Futures pricing indicates a reduced outlook for additional cuts in 2025, reflecting uncertainty in the markets about the Fed’s future moves.

Lenders are expected to react to these shifts cautiously. While a reduction in the federal funds rate usually suggests an opportunity for lower mortgage rates, experts caution that the impact may be gradual rather than immediate. The recent changes might not translate into significant reductions for borrowers, as lenders have likely already adjusted their offerings in anticipation of the Fed’s actions.

Why everyone’s watching the Fed and Japan right now

The intricacies of the relationship between Fed policy and mortgage rates highlight the complexity of current economic conditions. Though a lower federal funds rate might typically lead to reduced mortgage rates, several factors influence actual borrowing costs. Lenders consider a broad spectrum of economic indicators, which means mortgage rates could remain elevated despite the Fed’s rate cuts.

The modest 25 basis point cut in December contrasts sharply with the larger adjustments witnessed in September, where mortgage rates fell significantly following a 50 basis point reduction. While the latest cut may offer hope to potential borrowers, it is not guaranteed to produce a noticeable decrease in mortgage rates. Many lenders may have already priced in the anticipated rate cut, leaving little room for immediate adjustments.

Moreover, external economic conditions such as ongoing inflation, unemployment rates, and Treasury yields continue to play a critical role in shaping mortgage costs. Recent increases in mortgage rates over the past months underscore that even without a Fed meeting, market trends remain responsive to broader economic shifts.

The Fed’s cautious stance also reflects its ongoing struggle to balance inflation control with economic growth. As Powell noted, “We need to take our time, not rush and make a very careful assessment.” Future fiscal policies may complicate this assessment, particularly with new political policies emerging.

Disclaimer: The content of this article is for informational purposes only and should not be construed as investment advice. We do not endorse any specific investment strategies or make recommendations regarding the purchase or sale of any securities.

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