A cut in interest rates by the Federal Reserve would mean improved borrowing rates for borrowers. (iStock)
Federal Reserve System Lower the federal funds rate It rose by half a percentage point on Wednesday, something economists had largely expected as inflation continues to steadily incline toward the 2% target rate.
The central bank, focusing on rising unemployment, announced it would cut the federal funds rate by 50 basis points to a range of 4.75% to 5%. August employment report The Federal Reserve reported a net gain of 142,000 jobs, putting the unemployment rate at 4.2%. The Fed expects the unemployment rate to rise to 4.4% and remain there. Fed Chairman Jerome Powell said in a press conference on Wednesday that the U.S. labor market is strong and that the interest rate cuts are intended to maintain the labor market's strength.
Inflation rose 2.5% in August, the smallest increase in 12 months since February 2021. Core inflation, which excludes more volatile food and energy prices, rose 3.2%, up 0.3% month-on-month in August.
“The FOMC's forecasts indicated that inflation is returning to its target more quickly than the Committee had anticipated in June and that the unemployment rate is likely to have risen more than expected and remain elevated going forward,” said Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association. “While we won't be falling into a recession, the U.S. economy is likely to go through a period of slower economic growth.”
The Federal Reserve is expected to continue to cut interest rates this year, and if the economy develops as expected, the federal funds rate will By the end of this year, it will fall to 4.4% and 3.4% By the end of 2025.
“Now the Fed has started to cut rates,” said Ryan Marshall, CEO of Voxtuhl. “They'll likely continue to cut rates through the rest of the year to keep the economy as strong as possible, but how far will they go? We expect them to keep cutting rates until rates are hovering around 5%, barring a significant economic event, such as a big rise in unemployment, in which case we'll see them cut rates more aggressively.”
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The mortgage market is already pricing in cuts
For mortgages, the cut in interest rates is unlikely to make a big difference, as the expected cut is already factored into borrowing rates, which are Nearly 6% in recent weeksMortgage rates may continue to fall, according to Freddie Mac, but mortgage rates could continue to fall as the Fed signals the possibility of further rate cuts.
Falling mortgage rates have led to an uptick in refinancing and add-on purchases in recent weeks. With rates now near 6%, there are roughly 4 million homes with refinance opportunities, with more planned as the Fed begins its easing cycle, according to Thelma Hepp, chief economist at CoreLogic.
“It's important to note that lower interest rates have been talked about for some time, and potential homebuyers have been on the wait-and-see side hoping for lower interest rates and improved home affordability,” Hepp said. “With interest rates declining over the past four weeks, CoreLogic data shows that pending home sales are finally starting to improve steadily compared to last year.”
But high borrowing rates aren't the only challenge buyers face: The housing market is also plagued by a lack of inventory, keeping prices high even as demand for homes falls.
“The Fed is trying to stimulate housing while the economy is still in some good shape in terms of inflation and consumer confidence,” said Charles Williams, founder and CEO of Percy.AI. “Further interest rate cuts would be needed to create a mini-refinance boom, and homebuilders are building more first homes. So, additional interest rate cuts later this year could help support a housing market recovery in 2025 for both existing and new home sales.”
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Good fortune for consumers' wallets
The rate cut will be a much-needed relief for consumers who have become increasingly reliant on credit products: A recent report from TransUnion found that bank card balances grew 4.4% year-over-year in the second quarter of 2024.
Lower rates give borrowers more options and could encourage banks to expand credit to a broader segment of their consumer base, said Michelle Ranelli, vice president and head of U.S. research and consulting at TransUnion.
“Today's interest rate cuts may ultimately allow consumers to reduce their monthly payments,” Ranelli said, “and may encourage many consumers to consider refinancing their high-interest debt into lower-interest lending products, such as personal loans or mortgages.”
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