On Wednesday, the Federal Reserve announced it would cut rates by half a percentage point down to 4.75% - 5%. This is the first rate cut in four years, lowering the Federal funds rate from 5.25% - 5.5%, where it has remained since July 2023. The Federal funds rate is a macroeconomic indicator that affects the rate at which banks borrow from each other. By adjusting the rate, the Fed influences borrowing costs, causing banks to change their rates to consumers.
In its last meeting in late July, the Fed hinted that rate cuts could be on the table in the near future. This led to a discussion on whether the rate cut at September’s meeting would be the Fed’s standard deduction of 0.25% or a larger cut of 0.5%. The Federal Open Market Committee vote was 11-1 in favor of a 0.5% cut, with only Governor Michelle Bowman performing a quarter percentage point decrease.
Fed Chair Jerome Powell stated that recent economic data such as a slowdown in hiring combined with a declining inflation rate convinced Fed officials that a larger cut was needed. Besides the emergency rate reductions during COVID, the last time the Fed cut rates by half a point was during the 2008 global financial crisis.
The Fed funds rate and 30-year fixed mortgage rates tend to be correlated, meaning that rate cuts generally result in lower mortgage rates. Over the past few weeks, mortgage rates have already seen a slight drop down to 6.2%, the lowest value since February 2023. This decrease started earlier in anticipation of the looming rate cut, and the unexpected 0.5% slash in the Fed funds rate is expected to put additional downward pressure on mortgage rates.
Previously high rates over the last two years have turned potential homebuyers away - but lower mortgage rates moving forward could release pent-up demand, placing upward pressure on home prices.
Looking toward the future, the Federal Reserve has projected lowering interest rates by another half point before the end of 2024. The committee will have two more meetings throughout the remainder of the calendar year to hit a 4.25% - 4.5% benchmark rate. Through 2025, the central bank forecasts another full percentage point cut down to 3.4%, and then another half point in 2026 down to 2.9%. Jerome Powell mentioned that “the committee is in no rush”, and that “the process evolves over time”.
Plotify's Takeaway:
- The Federal Reserve cut the federal funds rate by half a percentage point down to 4.75% - 5%. This is the first cut since 2020.
- Mortgage rates are currently at the lowest point since early 2023 and are projected to drop further, creating more housing demand and higher home prices with more potential buyers.
- The Federal Reserve is looking to continue rate cuts over the next two years, projecting values of 3.4% in 2025 and 2.9% in 2026.
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