The Fed’s lower interest rates will mean better borrowing rates for borrowers. (iStock)
The Federal Reserve reduce the federal funds rate by half a percentage point on Wednesday, a development widely anticipated by economists as inflation continues to rise sustainably towards a target rate of 2%.
The central bank said it would cut the federal funds rate by 50 basis points, to a range of 4.75% to 5%, as it focuses on rising unemployment. August Employment Report The U.S. economy posted a net gain of 142,000 jobs and an unemployment rate of 4.2%. The central bank expects the unemployment rate to rise to 4.4% and stay there. Federal Reserve Chairman Jerome Powell said at a news conference Wednesday that the U.S. labor market is strong and the rate cut is aimed at maintaining its strength.
Inflation rose by 2.5% in Augustthe smallest 12-month increase since February 2021. Core inflation, which excludes more volatile food and energy prices, rose 3.2% and increased 0.3% month-on-month in August.
“The FOMC’s projections have shown that inflation is returning to its target more quickly than the Committee had anticipated in June and that the unemployment rate has increased and is expected to remain higher than expected,” said Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association. “While the U.S. economy is not expected to enter a recession, it is likely to experience a period of slower economic growth.”
The Fed is expected to continue cutting rates this year and has indicated that if the economy performs as expected, the federal funds rate could be reduced to 4.4% at the end of this year and to 3.4% by the end of 2025.
“We are now in the early stages of the Fed’s rate cut,” said Ryan Marshall, CEO of Voxtur. “We know the Fed will continue to cut rates throughout the year to keep the economy as strong as possible, but how far are they willing to go? We believe they will continue to cut rates until they are in the 5% range, unless there is a strong economic event, such as a sharp rise in unemployment. In that case, the Fed will be even more aggressive in cutting rates.”
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Mortgage market has already priced in rate cuts
For mortgages, this rate cut is not likely to create much change since this anticipated decline has already been incorporated into borrowing rates, which have fallen to almost 6% in recent weeksaccording to Freddie Mac. However, with the Fed indicating that further rate cuts could follow, mortgage rates could continue to fall.
Falling mortgage rates have spurred increased refinancing and some additional purchase activity in recent weeks. About four million households have the option to refinance as rates near 6% and more are in the pipeline as the Fed begins its easing cycle, according to Selma Hepp, chief economist at CoreLogic.
“It’s important to note that lower rates have been a hot topic for some time and potential homebuyers have been sitting on the sidelines in anticipation of lower rates and better affordability,” Hepp said. “With rates moving lower over the past four weeks, CoreLogic data revealed that pending home sales have finally started to show consistent improvement over last year’s activity.”
But high borrowing rates aren’t the only challenge buyers face; the housing market is also plagued by low inventory, which has helped keep prices high even as demand for housing declines.
“The Fed is looking to stimulate the housing market while the economy is still in a relatively favorable position in terms of inflation and consumer confidence,” said Charles Williams, founder and CEO of Percy.AI. “They will need to cut rates further to create a mini-refinancing boom, and builders are now building more prime homes. So with additional rate cuts coming later this year, 2025 will see a rebound in the housing market, both existing and new.”
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Consumers’ wallets get a break
The rate cut provides much-needed relief to consumers who are increasingly relying on credit products. According to a recent report from TransUnion, credit card balances increased 4.4% year-over-year in the second quarter of 2024.
Lowering interest rates would provide options for borrowers and could also prompt banks to expand their lending to a broader segment of the consumer population, according to Michele Raneri, TransUnion’s vice president and head of U.S. research and consulting.
“Lowering interest rates could allow consumers to benefit from lower monthly payments,” Raneri said. “It could also allow many consumers to consider refinancing higher-interest debt into a lower-interest credit product, such as a personal loan or home equity loan.”
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