Move was anticipated by investors that fund most home loans, who have been driving up mortgage rates over concerns about inflation and pace of future Fed rate cuts.
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Federal Reserve policymakers lowered short-term interest rates by a quarter of a percentage point Thursday, a move that had been anticipated by investors and isn’t expected to have much impact on mortgage rates.
Mortgage Bankers Association Chief Economist Mike Fratantoni said the MBA expects mortgage rates will “remain within a fairly narrow range over the next year.”
Mike Fratantoni
“Financial markets fully anticipated this rate cut, and the [Federal Open Market Committee’s] statement provides no new information regarding the likelihood of future cuts,” Fratantoni said in a statement. “The big impact on rates this week was clearly the election. As results rolled in, longer-term rates jumped higher. Investors expect somewhat stronger economic growth, higher inflation, and larger deficits.”
Look for mortgage rates to move higher on signs of economic strength, or lower if the economy shows signs of weakness, Fratantoni said.
The Federal Reserve doesn’t have direct control over long-term interest rates and yields on 10-year Treasury notes, a barometer for mortgage rates, jumped Wednedsay in the wake of Donald Trump’s successful bid to retake the White House.
Investors shunned bonds and piled into the stock market, in part due to expectations that the economy will take off under Trump. But there are also worries that the tax cuts and tariffs Trump has proposed will fuel more government borrowing and revive inflation.
Yields on 10-year notes had already retreated to Monday’s levels before the conclusion of Thursday’s Fed meeting, which was pushed back one day because of the election.
The CME FedWatch tool, which tracks futures markets to gauge the probability of future Fed moves, showed investors on Thursday saw a 78 percent chance that Fed policymakers will cut short-term rates by at least another half a percentage point by May 7, down from 96 percent on Oct. 7.
“Housing markets continue to be primed for a stronger spring homebuying season, boosted by more housing supply and slower home-price growth,” Fratantoni said.
Fed tightens, Fed eases
After dropping short-term interest rates to zero during the pandemic to keep the economy from crashing, Fed policymakers pivoted to fighting inflation, raising the federal funds rate 11 times between March 2022 and July 2023.
That brought the benchmark interest rate to a target of between 5.25 and 5.5 percent — the highest level since 2001. Having cut by half a percentage point on Sept. 18, Thursday’s smaller quarter percentage point reduction brings the federal funds rate to a target range of 4.5 to 4.75 percent.
Federal Reserve Chair Jerome Powell said Thursday that the latest “recalibration” of the central bank’s monetary policy stance “will help maintain the strength of the economy and the labor market and will continue to enable further progress on inflation as we move toward a more neutral stance over time.”
In an implementation note, Fed policymakers said the central bank will also quantitative tightening aimed at letting up to $25 billion in maturing Treasurys and $35 billion in mortgage-backed securities (MBS) roll off its books each month.
“We know that reducing policy restraint too quickly could hinder progress on inflation,” Powell said at a press conference. “At the same time, reducing policy restraint too slowly could unduly weaken economic activity and employment. Considering adjusting the federal funds rate, the committee will carefully assess incoming data, evolving outlook and balance of risks. We are not on any preset course. We will continue to make our decisions meeting by meeting.”
Mortgage rates on the rebound
Although inflation is falling toward the Fed’s 2 percent target, mortgage rates have been on the rise since the Fed started cutting rates.
Mortgage rates have climbed more 80 basis points from a 2024 low of 6.03 percent registered Sept. 17, to 6.84 percent Wednesday, according to rate lock data tracked by Optimal Blue.
Investors who fund most home loans have been demanding higher yields on mortgage-backed securities because the “dot plot” released by Fed policymakers in September showed they expected to bring rates down gradually. Recent data reports suggest the economy continues to expand at a healthy pace but could still be susceptible to inflation.
“As the economy evolves, monetary policy will adjust in order to best promote our maximum employment and price stability goals,” Powell said. “If the economy remains strong and inflation is not sustainably moving toward 2 percent, we can dial back policy restraint more slowly.”
Similarly, if the labor market were to weaken or inflation eased more quickly than anticipated, “we can move more quickly,” Powell said. “Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.”
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