US Federal Reserve Makes Biggest Rate Cut in 16 Years in September
This week, as anticipated by many Wall Street analysts, the Federal Reserve followed through with its expected interest rate cut.
On September 18, 2024, the central bank implemented a 50-basis point reduction, marking its first rate decrease since the pandemic and the largest single cut in 16 years.
As a result, mortgage rates began to fall even before the Fed's official announcement, providing a boost to the housing market. Lawrence Yun, the chief economist at the National Association of Realtors, commented on the move, stating, "The Fed's decision to cut rates by half a percentage point marks the start of what could be six to eight additional cuts stretching into 2025. The next reduction is likely to follow the presidential election. This action is driven by recent cooling inflation and slower job growth. Mortgage rates have already factored in the Fed's expected course, leading to a 150-basis point drop in the 30-year mortgage rate since the start of the year. Further reductions in mortgage rates may be minimal. While the Fed doesn’t directly control mortgage rates, a large federal budget deficit limits available capital for mortgage lending. Although future cuts are expected, their impact will be less significant. For homebuyers, the current lower mortgage rates compared to earlier this year have increased purchasing power by about $50,000 for those with a $2,000 monthly mortgage budget. Buyers previously priced out of the market might now have the opportunity to return."
Mike Fratantoni, chief economist at the Mortgage Bankers Association, added, "At its September meeting, the FOMC lowered rates by 50 basis points and indicated this is the first in a series of cuts expected to bring rates down by 2 percentage points by the end of 2025. There was some division among market participants about the extent of the cut, so this decision could lead to some rate volatility as investors adjust to the Fed’s projected path for monetary policy. Governor Bowman dissented, favoring a smaller 25-basis-point cut, but most of the Committee is more concerned about the weakening labor market. The FOMC’s projections suggest inflation is decreasing faster than expected, while unemployment is higher than forecasted and may stay elevated. Although a recession is unlikely, slower economic growth is anticipated. Additionally, the Committee’s estimate of the neutral federal funds rate continues to rise, with members seeing a long-term range of 2.5-3.5% as neutral.
"While the Fed's balance sheet of mortgage-backed securities (MBS) continues to decline under quantitative tightening (QT), no changes to the pace of QT were announced. However, faster refinances may accelerate the paydown of MBS holdings, as prepayments have been slower than anticipated since QT began.
"Mortgage rates seem to have already factored in this rate cut and the expected future reductions, with current rates nearing 6%. These lower rates have sparked increased refinancing and some additional home purchases in recent weeks. If mortgage rates remain near these levels, we could see a stronger-than-usual housing market this fall, potentially leading to a more robust rebound in activity next spring."