After years of higher rates by the Federal Reserve, it looks like thing might be changing.
Thanks to friendly inflation readings throughout the second quarter, more Fed members are signaling they are “getting closer” to cutting interest rates.
Remember, the Federal Reserve does not control mortgage rates (you can find out more about that here), but their actions and comments do impact the mortgage market.
It looks like the first cut might happen at their meeting on September 18. Inflation and labor market data between now and then will play a pivotal role in this decision.
Nick Timaros, the Wall Street Journal’s go-to writer for all things Federal Reserve, recently penned an article title “A Fed Rate Cut Is Finally Within View” (subscription required).
Three Reasons
Timaros thinks that a September cut is likely given these three factors:
- Inflation over the last quarter has shown progress and has given the Fed the confidence they need that inflation is going to get to their 2% target
- The labor market is starting to cool, with the unemployment rate rising each of the last three months and now at a level of 4.1%
- Fed Chairman Jerome Powell is concerned about waiting too long to cut rates and cause unnecessary economic weakness and a potential recession
What This Might Mean
A rate reduction this fall would be the first since the pandemic and could be a potential boost to the economy. Fed rate cuts, over time, typically lower borrowing costs for such things as mortgages, auto loans and credit cards.
It really depends on how the economy performs in the next few months. That factor will likely determine how quickly the Federal Reserve will act.
If economic growth remains solid and employers keep hiring, the Fed would most likely take its time and cut rates slowly as inflation continues to decline.
Mortgage Rates
For mortgage rate shoppers, one of the key messages for which to listen is the one the Fed talks about on inflation. Inflation is the enemy of mortgage bonds and, in general, when inflation pressures are growing, mortgage rates are rising.
Fortunately, this trend seems to be abating, but at a slow rate. We’ve also seen the 10-year Treasury Bond yield move lower, and that is actually a better measure of mortgage rates.
The 30-year fixed mortgage rate and 10-year treasury yield move together because investors who want a steady and safe return compare interest rates of all fixed-income products.
In Conclusion
We will be hearing more comments from the Federal Reserve and Chairman Powell over the next few weeks. Nothing is set in stone, but it does appear that rates might be coming down this fall.
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