Oversized move may have been the wrong one, suggests executive
A long-awaited interest rate cut by the Federal Reserve arrived last week – but the central bank’s oversized reduction may have been the wrong move, according to a leading mortgage executive.
Melissa Cohn (pictured), regional vice president at William Raveis Mortgage, told Mortgage Professional America that a more moderate cut than the Fed’s 50-basis-point reduction could have averted the unexpected uptick in bond yields that emerged after the decision.
The Fed’s move to cut more deeply than the standard 0.25% triggered some concern about a resurgence in inflation or a weaker-than-expected economic outlook, seeing bond yields inch upwards last week.
While Cohn said the Fed’s decision was unsurprising, she questioned the merit of a jumbo cut. “The American public did not get the reactions in the bond market that it was expecting. I think it probably was not the right move,” she said.
“This was the first rate cut in what will be a rate-cutting cycle, according to [Fed chair Jerome] Powell, probably for the next 16 months, 18 months. By making such a bold move, does it say that they were behind the eight-ball in terms of dealing with employment, because we’ve had three months of poor employment data? Are they just trying to prop up the stock market?”
In remarks after the Fed announcement, Powell was keen to pour cold water on the notion that oversized cuts could become the norm for the Fed as it embarks on the path to lower rates.
He said the Fed’s Summary of Economic Projections (SEP), which maps out members’ sentiments on the likely direction of the economy, gave no indication that its committee was “in a rush” to reduce rates dramatically.
Breaking News: The US Federal Reserve has cut interest rates by 0.5% for the first time in four years, bringing the overnight rate to 4.75-5%.
— Mortgage Professional America Magazine (@MPAMagazineUS) September 18, 2024
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The economy remains in “good shape,” according to Powell, growing at a solid clip with inflation continuing to regress and little chance of a downturn in the months ahead.
For Cohn, that seemingly strong economic outlook means it made little sense for the Fed to cut so dramatically. “You have to say: What are the greater risks to the economy?” she said. “Why did the Fed go for that big half-point cut? Is there something that we don’t know, that they know?”
Fed faces uncertain path ahead on the road to lower rates
The big cut may have been an admission on the Fed’s part that they should have lowered rates earlier, she added, instead of deciding to hold steady in July. “Maybe they’re just catching up to where they think that they need to be.” Still, its latest move has “unsettled” the bond market.
Plenty of economic curveballs could appear between now and the end of the year – not least November’s looming presidential election, featuring two candidates with radically different views of the best path forward for the US economy.
Weekly jobless claims across the country hit a four-month low for the week ended September 14, suggesting the economy is far from flagging, although recent revisions have also indicated that job growth has been weaker throughout the year than originally thought.
That’s presenting something of a “conundrum” for the Fed, Cohn said. “In my eyes, they probably would have been better easing their way into the rate-cutting cycle than jumping into it the way they did.”
Are higher mortgage rates on the way?
On Thursday, former Treasury secretary Larry Summers sounded a warning note on the extent of likely Fed cuts in the months ahead, suggesting that persistent inflation could prevent decisionmakers from reducing rates as much as they might have hoped.
Speaking to Bloomberg, Summers said inflationary risks associated with the Fed’s rate-cutting plans were “pretty significant” and indicated his view that higher mortgage rates could also be on the way.
While 10-year Treasury yields remain well below their highs of 2023, Summers emphasized that higher yields down the line would push rates up. “The rates that people are now seeing on mortgages may be relatively low compared to… the average of where they’re going to be over the next five years,” he said.
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