In the just-released Federal Open Market Committee (FOMC) statement, the Fed announced no change to the Fed funds rate. Despite several former Fed Presidents’ recent calls for a rate cut today, this was in keeping with consensus market expectations. The Fed funds range remains set at 5.25% to 5.50%, a 23-year high and where it’s been for the past eight FOMC meetings, dating back 12 months to July 26, 2023.
The Fed guidance the market is looking for today will come from the policy statement (watch for changes to the sentence “Inflation has eased over the past year but remains elevated”) and Fed Chairman Powell’s press conference. No updated SEP “dot plot” projections are being released at today’s meeting (more on that below).
Given the recent trending of the core-PCE and CPI inflation readings and moderating job market numbers, market participants perceive the risk levels of the Fed’s dual mandate of maximum employment and price stability have become more balanced. That’s created the expectation Powell will provide a signal the stage is set for the first of a new cycle of 25bps Fed Funds rate cuts at the next FOMC meeting that concludes on September 18. Further, the market will look for indications of the Fed’s expectations for how fast and far a cycle of rate cuts will go towards bringing the policy target down towards the 2% inflation goal.
What’s Next?
With a nearly 100% expectation for the first rate cut coming at the September meeting and the beginning of a cycle of rate cuts to follow, investors’ immediate focus is on how many times the Fed is planning to cut the Fed Funds rate in 2024. Once? Twice (the consensus)? Or possibly three times?
Complicating matters are the cross-currents of a presidential election year, geopolitical risks associated with the wars in Europe and the Middle East, global inflation and economic developments, and an eventual increase in the size of U.S. Treasury financing auctions. The Treasury is indicating it will be several more quarters before they expect to materially increase auction sizes, but that is coming and plays into not only the general level of interest rates, but also the relative posture of elevated short-term rates to longer-term rates where fixed mortgage rates are sponsored.
Until the September meeting, there are two months’ worth of inflation and jobs data to contend with. The Fed has its annual symposium in Jackson Hole, Wyoming in August and that is another opportunity for Powell to address market expectations.
It’s worth mentioning that there is an expectation that the pace of rate cuts going forward will coincide with the announcement of dot plot rate cut projections. As mentioned above, there was not a refresh of the dot plots announced today, and no initial rate cut. The FOMC calendar has dot plot projections being announced at the September and December meetings, but not at the November meeting. Typically, the dot plots are refreshed at every other meeting. If inflation and the jobs market continue along their current paths, it’s expected rate cuts would come at FOMC meetings with dot plot announcements. In other words, a 25bps rate cut at every other meeting beginning in September. This is obviously situational, but I mention it as the Fed will likely address this expectation if it feels changing circumstances will have it deviate from this approach.
The takeaway from the present situation is twofold — yes, mortgage rates will likely trend lower as the Fed cuts monetary policy rates. Second, the current high level of volatility, a short-term phenomenon (think typical rate lock period), will just as likely mean that the path lower is not a smooth decline. Potential borrowers will hear rates are declining, but in the immediate timing of closing a transaction, they may face rates that are increasing or at least above the level they expected.
What Do Borrowers Do Now?
Originators should explain to borrowers looking to finance the purchase of a home that even as rates are expected to fall over time, the current mortgage rate market remains exposed to greater-than-typical levels of uncertainty that could lead to higher rates within typical rate lock periods.
The available housing inventory is still tight and will remain so for years to come. After finding a home for purchase and achieving an accepted offer, the best course of action is to secure financing quickly to avoid the worst of possible market volatility that could upend those plans.
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