Citing that inflation has made further progress toward its 2% goal, the Federal Open Market Committee (FOMC) today voted to cut the Fed Funds rate by 0.50 percentage points to a range of 4.75% to 5%.
“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the FOMC writes in its statement. “Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.”
Many economists were predicting a 0.25 rate cut but the committee, citing that it has “gained greater confidence that inflation is moving sustainably toward 2 percent,” approved a 0.50 cut – however the vote was not unanimous: Committee member Michelle W. Bowman, who was the lone dissenter, says she would have preferred to lower the target range by 0.25 percentage points.
The committee notes that the current economic outlook is “uncertain,” and that it will continue to monitor incoming data before deciding on the next possible cut.
“In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the FOMC states.
This includes taking into account “a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
The FOMC, however, has indicated that this is the first in a series of cuts.
In a statement, Mike Fratantoni, senior vice president and chief economist for the Mortgage Bankers Association, says the FOMC has “signaled that this is the first cut in a series that should bring rates down by about 2 percentage points by the end of 2025.”
“Market participants had been divided about how much the Fed would cut at its meeting today, so this decision is likely to spur some rate volatility as investors adjust to this expected path for monetary policy,” Fratantoni says. “Governor Bowman dissented from this decision, preferring a 25-basis-point cut, but it seems that the rest of the Committee is more worried about the weakening job market.”
“The FOMC projections highlighted that inflation is returning to target more quickly than the Committee had expected in June and that the unemployment rate has moved higher and is likely to stay higher than expected,” Fratantoni says. “While not likely to be in a recession, the U.S. economy is likely in for a period of slower economic growth. It is also important to note that the FOMC’s estimates of the neutral fed funds rates keeps moving up, and that the committee members see a range of outcomes, from 2.5 percent to 3.5 percent as consistent with neutral in the long run.”
“The Fed’s MBS holdings have continued to gradually decline with QT,” Fratantoni adds. “While there no changes to the pace of QT with this statement, faster refinances will result in the MBS portfolio paying off more quickly as prepayments have been well below the cap since the beginning of QT.”
“Mortgage rates likely had this cut – and this expected rate path – priced in, and lower mortgage rates, now close to 6 percent, have resulted in much more refinance and some additional purchase activity in recent weeks,” Fratantoni says. “We do expect that if mortgage rates remain near these levels, it will support a stronger than typical fall housing market and suggest that next spring could see a real rebound in activity.”
So how far will the Fed go in the months to come?
In a statement, Ryan Marshall, CEO, Voxtur Analytics predicts the Fed will continue to cut rates until they are “hovering at 5 percent, unless there is a strong economic event, like a major uptick in unemployment – in which case, the Fed will get more aggressive in cutting rates.”
Photo: Etienne Martin