The Federal Reserve laid the groundwork for a September interest rate cut at the conclusion of its two-day meeting Wednesday, but the much-anticipated reduction may offer little relief to Americans squeezed by higher borrowing costs.
This limited impact is due to the fact that expectations of Federal Reserve rate cuts are already factored into current mortgage rates. Investors and financial markets have anticipated these potential cuts, which means the existing mortgage rates reflect the projected rate reductions. Consequently, any forthcoming rate cuts by the Fed are unlikely to lead to substantial decreases in mortgage rates. The market’s anticipation diminishes the effect of actual rate reductions, as the potential benefits are already “baked into” the current rates, limiting further declines in mortgage rates.
Fed Chair Jerome Powell told reporters at a press conference after the central bank voted to hold rates steady at a two-decade high that a September rate cut could be “on the table” if inflation continues to cool. “We’re getting closer to the point at which it’ll be appropriate to reduce our policy rate,” Powell said, “but we’re not quite at that point.”
Further complicating the outlook, a brutal week on Wall Street ended with major indexes near two-month lows Friday after sluggish U.S. jobs data rekindled economic slowdown fears and sent stock market volatility skyrocketing to nearly two-year highs. Treasury yields plunged to levels last seen in December as investors fled stocks for perceived safety in fixed income and dialed up rate cut odds, responding to the weakest jobs report since April and one of the worst in the post-pandemic era.
“This week it seems clear to me that markets shifted from a prior focus on inflation and potential Fed cuts, where bad news was being treated as good news because it increased the likelihood of cuts, to a focus on slowing economic growth, where bad news is now treated as bad news,” said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.
July U.S. jobs growth slowed to 114,000 from a downwardly revised 179,000 in June, and unemployment climbed to 4.3% from 4.1%, the U.S. government said Friday in a report that added to pressure on the Federal Reserve to cut rates. The market now prices in growing chances that the Fed will deliver dramatic easing by year-end. “Investors are shifting from focusing on inflation risks to recession risks,” said Michelle Gibley, director of international research at the Schwab Center for Financial Research.
The “announcement doesn’t change the outlook for the year when it comes to mortgage rates,” said Afifa Saburi, capital markets analyst at Veterans United Home Loans. Saburi noted that if the Fed delivers fewer cuts than investors currently expect, there could even be a “slight pull back” in mortgage rates. “If that happens, the range we have seen this year for rates will remain intact,” she said. “Potential savings are low for a prospective homebuyer hoping for rate improvement this year.”
Mortgage rates spiked in 2022 and 2023 as the Fed waged an aggressive campaign to crush high inflation. In the span of just 16 months, the central bank approved 11 rate increases — the fastest pace of tightening since the 1980s.
Rates on the popular 30-year fixed mortgage are currently hovering around 6.73%, according to Freddie Mac. While that marks a decrease from a peak of 7.79% recorded last fall, it remains notably higher than the pandemic-era lows of just 3%.
Higher mortgage rates over the past three years have created a “golden handcuff” effect in the housing market. Sellers who locked in a record-low mortgage rate of 3% or less during the pandemic have been reluctant to sell, limiting supply further and leaving few options for eager would-be buyers.
Yet rates are likely to end the year around 6.4%, and remain above 6% throughout most of 2025, even as the Fed prepares to cut interest rates for the first time in four years, according to Lisa Sturtevant, Bright MLS chief economist.
Sources:
https://www.foxbusiness.com/economy/interest-rate-cuts-horizon-high-mortgage-rates-could-here-stay
https://www.schwab.com/learn/story/stock-market-update-close