Further cuts seem to be on the way – but there's little clarity over when and by how much
Federal Reserve officials have remained coy on the prospect of another interest rate reduction this month – but odds of a cut jumped after new economic data released last week showed a stabilizing labor market and a rise in job openings.
Market expectations of a 25-basis-point trim on December 18 have surged, although there’s less certainty on the question of how long – and by how much – the Fed is prepared to continue cutting rates.
While mortgage rates don’t move directly in tandem with the Fed’s funds rate, the central bank’s approach is a key influence on investors’ expectations around inflation and economic growth.
Speculation continues to intensify over the impact Donald Trump’s return to the White House in January will have on the economy, and notably whether threatened tariffs against multiple countries could put upward pressure on inflation.
The Fed has so far refused to commit to a timeline for bringing rates lower, even if officials believe more cuts are needed – and that’s unsurprising, according to Shelly Antoniewicz (pictured top), chief economist at the Investment Company Institute (ICI), as it weighs up the 2025 landscape.
“They understand that the outlook, particularly for fiscal policy, can change when a new administration comes in but they tend not to react to that right away because they want to see what the proposals are first,” she told Mortgage Professional America.
“They need to know what that actually looks like. It could get in place before they would adjust monetary policy in any way to account for fiscal policy or changes in fiscal policy. So right now, I think that impacts the Fed’s policy. The Fed themselves changing their outlook is more up in the air because they just don’t know what the exact policies are going to be, what’s going to be put in place.”
The privatization of Fannie Mae and Freddie Mac is back in focus as Trump prepares to take office. Supporters, including Bill Ackman, foresee potential gains, but critics warn of higher mortgage costs for borrowers.https://t.co/vsfMStRzMH
— Mortgage Professional America Magazine (@MPAMagazineUS) December 3, 2024
Is the economy trending in the right direction for rate cuts?
The CME Group’s FedWatch tool, which aggregates market watchers’ views on the Fed’s likely approach, suggests the central bank is likely to hit pause on rate cuts in January – and while the outlook is “muddy” on when further reductions might occur, markets have currently baked in at least two more 25-basis-point cuts by October, with split odds of a further 0.25% slice in December.
That would mark a milder pace and depth of Fed cuts than many observers expected earlier this year, probably because of recent decisionmaker comments suggesting a robust and resilient economy, according to Antoniewicz.
“GDP [gross domestic product] growth is still pretty strong,” she said. “The Atlanta Fed puts out a GDPNow forecast, and they’re saying fourth-quarter GDP growth is 3.3%. That’s very strong, and so that makes the Fed and Fed governors feel we’ve got some room to play around with – because inflation is not where their target is.”
The annual rate of inflation ticked up to 2.6% in October, an increase from 2.4% in September, while the PCE Price Index – which excludes food and energy costs – was even higher at 2.8%.
What’s more, the Federal Reserve Bank of Cleveland’s Inflation Nowcasting, which predicts future price growth, believes that core inflation figure likely jumped again in November, to about 2.9%. “That’s a tick up from 2.8% and in the wrong direction,” Antoniewicz said. “So that’s something to think about in terms of expectations for future [Fed] easing.”
December cut would mark third Fed rate reduction of 2024
The Fed raised its funds rate aggressively throughout a two-year spell in response to a spike in inflation, which peaked at 9.1% in June 2022.
It kept that rate at a range of 5.25% to 5.5% for over a year, before a reduction in September 2024 that marked its first cut since the beginning of the COVID-19 pandemic. That bumper 50-point move was followed by a 0.25% cut in November, bringing the rate down to its current level of 4.75% to 5.0%.
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