All eyes are on the central bank as it weighs up a September rate cut
Its language is always keenly tracked by market watchers eager to glean insights on where interest rates are headed – but more eyes than usual will be on the Federal Reserve in the weeks ahead as it weighs when to start cutting rates.
That’s because a glut of recent data has suggested the US economy is beginning to slow at a faster clip than before, raising market expectations that the first Fed cut for over four years is on the way in September.
Mortgage rates have slid in August off the back of that weaker-than-expected outlook, which has seen the unemployment rate continue ticking upwards and another dip in core and overall inflation towards the central bank’s 2% target.
While mortgage rates are tied more directly to long-term interest rates such as the yield on 10-year Treasury bonds, the Fed’s actions can indirectly impact that area through rate hikes or cuts that affect investor expectations about future inflation and economic growth.
How far will the Fed go in its September decision?
At present, the main question about the Fed’s next decision, scheduled for September 18-19, isn’t whether it will cut rates; that appears a sure-fire thing. Instead, it’s whether decisionmakers will trim the funds rate by 25 basis points or a larger-than-usual 0.5%.
Melissa Cohn (pictured top), regional vice president at William Raveis Mortgage, told Mortgage Professional America that much will depend on how economic indicators play out in the weeks before that decision. “If the September jobs report is weaker than the market is expecting, I think we’ll see a 50-basis-point cut,” she said.
“If the number is more in line with what the markets are looking for, then I think that they may stick with a 25-basis-point cut, going off their rhetoric of really needing to fight inflation and not wanting to cut rates too much [to do that], which could technically reignite inflation.”
US mortgage rates are falling, and Kurt Brandly of Greenside Capital sees a surge in activity! With the Fed expected to cut rates, now might be the time to act on refinancing or buying. https://t.co/yCap6oeRof
— Mortgage Professional America Magazine (@MPAMagazineUS) August 16, 2024
The emergence of cracks in the labor force roiled markets in early August, sparking questions on whether the Fed had been overly conservative in its approach by keeping rates too high for too long.
Still, a degree of calm has since prevailed, with the stock market bouncing back from its brief plunge, and Cohn said it was too early to accuse the Fed of resting on its laurels. “It’s only one report,” she said. “If we have another month of it then yes, the Fed obviously has waited probably longer than they should have.
“But [Fed chair Jerome] Powell was pretty clear with us earlier this year that he would rather overshoot the mark on being late for their first rate cut than starting to cut too early and reigniting inflation.”
The main question the Fed is grappling with, Cohn said, is how focused it needs to remain on the inflation outlook at the cost of employment – “or do you try to support the employment sector, support the consumer at the risk of [an inflation uptick]?”
Inflation outlook provides breathing space for Fed
Welcome news for the central bank arrived last week with data showing inflation fell to a three-year low in July – and Federal Reserve Bank of San Francisco President Mary Daly, a voting member of the Fed’s Open Market Committee this year, suggested in an interview with the Financial Times that the economy is “not in an urgent place” despite an uptick in unemployment.
July’s core consumer price index, a gauge preferred by economists as a measure of underlying inflation, saw a 3.2% year-over-year increase – the fourth month in a row it’s fallen. The overall inflation figure came in at 2.9% compared with the same time in 2023, marking a continued dip from the red-hot price growth in recent years that precipitated an aggressive spate of rate hikes by the Fed.
Powell is scheduled to speak on Friday morning at the Jackson Hole Symposium, a speech that could provide an indication of how sharply the Fed intends to act in its September meeting, while one further jobs report – on September 6 – is set to arrive between now and that decision.
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