FOMC Announces 0.25% Fed Funds Rate Cut

In the just-released FOMC statement, the Fed announced a 0.25% (25 basis points, or bps) cut to the Fed funds rate. This cut moves the Fed funds range down to 4.50% – 4.75%.

The Fed members’ “dot plot” projections were not refreshed at this meeting. That leaves market reactions to come from the rate cut, revisions to the policy statement, and Chairman Powell’s press conference. Of course, continuing equity and bond market reactions to the election results are ongoing, too.

Yesterday’s “bull steepener” reaction to the Trump and Republican Senate victories, with long-term treasury yield increases surpassing short-term yield increases, were driven by expectations for even better economic performance and the accompanying inflation pressure that will bring. Part of that reaction was also in anticipation of further tax cuts, increased deficit spending and the impact of new tariffs. This played out with a significant rally in the equity markets as well.

And this was in addition to the unexpected strength in economic readings that came out after the 50bps Fed funds rate cut in September that already reversed the decline in mortgage rates that occurred in August.

What’s Next?

Still to be determined are election results in the House of Representatives. If those deliver a full Republican sweep, we can expect a test of the 4.50% yield level on the 10-year Treasury and the upward pressure that will add to mortgage rates.

With this election outcome in mind, Powell’s guidance on the forward path for rate normalization will be listened to closely. Changes to expectations of the landing rate and the pace to reach it will set the stage for market movement as the final election outcome in the House becomes known. The significance of this uncertainty can’t be overstated. The immediate rate question is whether a 25bps cut at the December 18 FOMC meeting is still in the cards. And if not, at what pace can further rate cuts be expected? Every other FOMC meeting? Or an even longer drawn-out pace?

Whether the December FOMC meeting will bring a rate cut or not, it will also be watched closely for the impact of revisions to the Fed’s economic projections as a result of the election. That December 18 meeting will bring a re-fresh of the dot plots which will provide a clear visual of how the Fed’s economists are shifting expectations, with the job market and inflation.

If that’s not enough to navigate, the complicating matters of geopolitical risks associated with the wars in Europe and the Middle East are ever present as well. It is not inconceivable that until Trump’s inauguration (and beyond) the wars in Europe and the Middle East can create another layer of significant rate volatility. As they say, stay tuned.

What Do Borrowers Do Now?

Originators should explain to borrowers looking to finance the purchase of a home that even as rates are still 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 remains 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.