Mortgage Rates Plunge to 3-Year Low Amid Anticipation of Fed Rate Cut
Mortgage rates have fallen to a 3-year low as the market anticipates a potential rate cut by the Federal Reserve at its upcoming meeting. The current environment mirrors the situation in September 2024, raising questions about the potential impact of the Fed's decision on long-term rates.
Current Mortgage Rate Landscape
According to Mortgage News Daily, the average rate on the 30-year fixed mortgage dropped by 12 basis points to 6.13% on Monday. This represents the lowest level since late 2022. This drop aligns with historical patterns observed during past Fed rate cut periods.
Historical Trends and Expert Analysis
Willy Walker, CEO of commercial real estate firm Walker & Dunlop, noted historical trends in a CNBC Property Play video podcast. He explained that during recessionary periods, Fed rate cuts tend to lower the long end of the curve, impacting 10-year and 5-year yields. However, in non-recessionary times, the impact on long-term rates is often limited. Even with expected rate cuts, Walker doesn't anticipate significant impact on long-term yields.
"If you go back to 1980 and the nine Fed rate cut periods over that 45-year period, the ones where the Fed cuts in a recessionary environment end up pulling down the long end of the curve, pull down the 10-year, pull down the 5-year,"
The Fed's Impending Rate Decision: Factors and Timing
The Federal Reserve's rate decision on Wednesday is highly anticipated, with many economists predicting the first rate cut of 2025. The primary question revolves around the depth of the cut and whether it signals a broader shift in monetary policy.
Navigating Economic Uncertainty and Political Pressure
The Fed is facing economic uncertainty, with a slowing labor market and rising inflation due to President Trump's tariffs. Federal Reserve Chair Jerome Powell has emphasized the Fed's independence and its reliance on economic data, rather than political influence, in making policy decisions.
Erasmus Kersting, an economics professor at Villanova University, highlighted the balancing act the committee faces, weighing the risks and benefits before making a final decision.
Fed Decision Timing and Market Expectations
The Fed will announce its rate decision at 2 p.m. EST on September 17. The probability of a 0.25 percentage point cut is high, standing at 96% according to CME FedWatch. Economists will be keenly observing the Fed's forward guidance regarding future rate cuts.
The Fed's Dual Mandate: Inflation vs. Employment
The Federal Reserve operates under a dual mandate to maintain low inflation and ensure full employment. These goals can conflict, as controlling inflation often involves raising interest rates, which can slow economic growth and hiring. Currently, the Fed is grappling with inflation exceeding its 2% target and a weakening labor market.
Contrasting with Other Central Banks and Tariff Implications
President Trump has criticized the Fed's previous inaction on rate cuts, comparing it unfavorably to the Bank of England and the European Central Bank. However, the U.S. faces the unique challenge of Trump's tariffs, which are primarily borne by American businesses and consumers and have the potential to fuel inflation.
Impact on American Consumers and the Housing Market
Rising costs are weighing on American consumers. A recent poll indicates that many believe prices will continue to increase. Despite President Trump's concerns about high mortgage rates, which he blames on the Fed, rates have already begun to decline in anticipation of a rate cut. Experts say a rate cut could provide relief to indebted households. Stephen Kates, a Bankrate financial analyst stated in an email that lower rates can ease the burden on many indebted households.
