FOMC Announces 0.25% Cut to Fed Funds Rate

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 was as expected and moves the Fed funds range down to 4.25% to 4.50%.

A quick reminder: this rate cut does not directly change term rates like fixed mortgage rates, but it does influence term rates by way of what this action implies about the economy and inflation seen through the Fed’s looking glass. As this cut was expected, it was already baked into term rates, but the rest of today’s news from the Fed is new and that could deliver term rate changes.

Of greater interest to markets today than the rate cut, the Fed members’ latest update to their “dot plot” projections has been released. That means we will see market reactions coming from the rate cut, revisions to the policy statement, revisions to the dot plots, and Chairman Powell’s press conference. That’s a lot of information to digest.

The attention the dot plot revisions will get is twofold. First, will the projection for the 2025 rate bump up 25bps, a function of recent stronger economic readings? Secondly, will the longer-run dot plot increase to 3%, reflecting the Fed’s current (higher) estimate of the neutral rate? At his press conference expect Powell to be questioned again about what additional uncertainty they have regarding the impact of the incoming administration’s tariff, tax, and spending plans on the “economy yet to come” (to paraphrase an expression from Mr. Dickens).

In recent weeks post-election, we have seen the equity markets rally and the bond markets fall (fall price-wise, pushing term rates like fixed mortgage rates up). This has been in reaction to the inflation risk that tariffs are expected to bring and to labor costs resulting from deportation plans. These added risks make changes in the Fed’s dot plot projections of particular interest. We can expect that difficulty to continue until after actual policy moves are made and their impact on the economy and inflation begins to show up in the backward-looking economic indicator readings. And that won’t be until sometime mid-year 2025.

What’s Next?

Powell’s guidance on the forward path for rate normalization will be listened to closely and what the dot plots imply relative to that. Changes to expectations of the landing rate and a slower pace of rate cuts to reach it will set the stage for market movement in the next few months’ time. Of particular interest will be how Powell addresses a pause in the timing for the next rate cut. Today’s guidance will likely reset the general borrowing public’s expectations for mortgage rates for the first quarter of 2025, which includes the beginning of the 2025 purchase season.

The complicating matters of geopolitical risks associated with the wars in Europe and the Middle East, including the way forward for Syria and Iran are ever present as well. Until Trump’s inauguration, geopolitical events can create an added layer of rate volatility — specifically, the possibility for sudden rate drops, then a grind back to the higher rates we face today.

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, but at a slower pace, the current mortgage rate market remains exposed to greater-than-typical levels of uncertainty within a typical rate lock period.

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.