Expectations of a larger cut than first thought likely have surged in light of a slowing economy
The eyes of the mortgage industry are squarely set on government inflation data scheduled to be released this morning, with speculation growing that a weaker-than-expected reading could spur a jumbo September interest rate cut by the Federal Reserve.
The Fed has all but confirmed its intention to start cutting rates this month: in comments towards the end of August at its annual retreat in Jackson Hole, chair Jerome Powell signaled that “the time was right” for rates to begin falling.
Markets had already started to price in the likelihood of a 25-basis-point cut in the Fed’s next meeting, penciled in for September 17-18. But continuing sluggishness in the overall labor market has raised alarm about the extent of the US’s economic cooldown – adding extra weight to today’s inflation report.
US inflation dropped to an annual rate of 2.9% in July, its slowest pace for over three years. That marked a significant fall from its peak in the latest inflation cycle of 9.1%, the highest level it had seen since 1981.
The average rate on a 30-year mortgage has also fallen significantly in recent weeks, currently hovering around the 6.35% mark – well down from highs of above 7% last year and through the opening months of 2024.
Is a slowing labor market giving the Fed pause for thought?
A larger Fed cut than anticipated, potentially of 50 basis points, could set the stage for rates to fall even further. “Overall, the market really jumped exponentially three weeks ago,” Marty Medve (pictured top), a loan originator with Trident Home Loans, told Mortgage Professional America.
What’s more, August’s jobs report saw nonfarm payroll employment for June and July revised downward, meaning 86,000 fewer jobs were added in those months than first thought.
US mortgage rates have fallen to 6.47%, sparking renewed interest in buying and refinancing! Kurt Brandly from Greenside Capital reports increased activity, but with potential Fed rate cuts ahead, timing is key.https://t.co/Rv21QhA8Ln
— Mortgage Professional America Magazine (@MPAMagazineUS) September 6, 2024
“The whole thing is that price drops are already priced in [to the market] and we do expect it to accelerate because inflation is low, and the jobs report was misrepresented dramatically,” Medve said.
“The Fed came out with an unprecedented announcement four weeks early [at Jackson Hole] and said they’re going to drop rates, which they never do, because they realized they got caught with their pants down. The jobs report was not supporting the economy.”
That means the Fed likely now needs to act quickly, “and probably even more severely than they had hoped for,” he added. “We’re going to see that priced in the bond markets. We’re already seeing that with better rates. So we’re pretty happy.”
How willing is the Fed to consider an oversized cut?
The central bank has maintained a cautious stance on interest rates until now, preferring to hold rates where they are throughout this year as it weighs up whether inflation is declining at a steady enough clip to justify cutting.
Taking a similarly measured approach to bringing rates lower is the right move, according to Philadelphia Fed president Patrick Harker, who told Yahoo Finance in August that a quarter-point cut “makes a lot of sense to me” as the Fed’s first rate trim.
Still, he also signaled a willingness to consider a sharper cut if the labor market outlook darkens significantly further – but “right now, that is not in our forecast.”
Speaking at Jackson Hole, Powell also kept his cards close to his chest on the question of whether the first cut would total 25 or 50 basis points. He said the “timing and pace” of rate cuts were dependent on factors including incoming data, the changing outlook, and balance of risks.
Some economists believe the time is now to begin making more ambitious cuts – including Nobel Prize winner Joseph Stiglitz, who says the Fed went “too far, too fast” in tightening rates.
Irrespective of whether the Fed cuts by 25 or 50 basis points, homebuyer sentiment towards the housing market appears to be slowly on the up as expectations grow of lower rates down the line.
The week ending August 30 saw mortgage applications across the country tick upwards by 1.6%, according to the Mortgage Bankers Association (MBA), driven by a 3% weekly increase in purchase applications.
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