Powell set to drop hints in Jackson Hole address
All eyes were on Jackson Hole today, where Federal Reserve chair Jerome Powell was scheduled to deliver a keynote address at the Kansas City Fed’s annual summit – and map out the path ahead on interest rates.
Powell’s speech arrived against the backdrop of a darkening outlook for the US economy as a weakening labor market and recent uptick in unemployment continue to raise eyebrows.
Gathering economic storm clouds appear to have made interest rate cuts in the months ahead a near certainty. Still, although markets have toyed with the idea of a larger-than-usual cut in September of 50 basis points, a majority of economists polled by Reuters indicated that a quarter-point drop that month – and two further cuts before the end of the year – remains the likeliest outcome.
That’s an outlook shared by Left Coast Leaders broker/owner Amir Nurani (pictured), who cautioned brokers against advising clients that the Fed’s rate will post a dramatic immediate fall. “The Fed still has PTSD from what happened during the COVID era when they smoked rates down to nothing and made money really, really cheap,” he told Mortgage Professional America in an interview conducted prior to Powell’s speech.
“The path down, I don’t think is going to be as aggressive. I don’t think we’re going to see 100-basis-point rate cuts. I think that what we’re going to ultimately see is 25-basis-point rate cuts… through the end of the year.”
Why an aggressive spate of rate cuts looks unlikely
The Fed’s desire to avoid another flareup in inflation, which it targeted through a flurry of aggressive rate hikes in 2022 and 2023, mean it’s likely to take a safety-first approach to rate cuts throughout the remainder of this year, according to Nurani.
If it grows increasingly confident that inflation is in the rearview mirror, he said, next year could see rates begin to fall at a faster clip, mirroring the Fed’s approach on rate hikes to begin with. “I think that as we go into 2025, we’ll start seeing acceleration,” he said. “It would make sense because when the Fed was tapering up, you saw more aggressive rate hikes in the beginning.
“They started slowing down to quarter-point rate hikes as they got closer to the peak. And so I think… lowering by small increments in the beginning [makes sense], and then if it warrants they will make larger cuts – maybe towards the back half of 2025.”
Although the Fed was expected, at the beginning of the year, to cut rates several times throughout 2024, it has decided to keep its key rate unchanged for each of its decisions so far this year.
That was due in part to an economy that defied predictions of a slowdown in the opening quarters of the year, with 272,000 jobs added to the labor market in May – a figure that far surpassed expectations.
Still, that resilience has waned in recent months. The unemployment rate climbed to 4.3% in July, a level not seen for nearly three years, while job growth slowed to 114,000 in a development that spooked markets and sparked fears of an impending recession.
What’s next for the housing and mortgage markets?
As markets price in a likely Fed rate cut in September, mortgage rates have seen a corresponding dip. The 30-year fixed mortgage rate is now hovering around the 6.5% mark, according to the Mortgage Bankers Association (MBA), a drop that’s helped bring some buyers back to the national housing market.
Joel Kan, MBA’s vice president and deputy chief economist, attributed the reduction of mortgage applications to a stabilization in both mortgage rates and application volumes after recent financial market fluctuations.
— Mortgage Professional America Magazine (@MPAMagazineUS) August 21, 2024
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The National Association of Realtors (NAR) said on Thursday that sales of previously owned homes across the country had risen by 1.3% in July, bringing an end to four consecutive months of decline, as mortgage rates ticked downwards.
That jump was nothing to write home about; July’s pace was the slowest for the month since 2010, when the national economy was still reeling from the aftermath of the subprime mortgage meltdown.
Still, “consumers are definitely seeing more choices,” NAR’s chief economist Lawrence Yun noted in prepared remarks following the data release, “and affordability is improving due to lower interest rates.”
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