Fed Issues 0.50% Rate Cut, Biggest Since March 2020

The Federal Reserve cut its key interest rate by 0.50% today in the most anticipated Fed meeting in years. It was the biggest cut since March 2020 when the U.S. economy faced the COVID-19 pandemic.

The group, tasked with balancing U.S. inflation and employment, made a bigger cut than many expected.

Markets were torn on whether the Fed would issue a quarter-point cut or take a more aggressive stance to address recent weaker economic reports. Just days ago, a 0.50% reduction seemed improbable but is now the reality.

Former fed funds range: 5.25-5.50%
New range: 4.75-5.0%

How Are Mortgage Rates Reacting?

Mortgage markets initially improved before turning slightly worse for the day.

It seems counterintuitive, but markets already had some of the larger 0.50% cut priced in during the days leading up to today's announcement.

So what brought mortgage rates slightly higher? The market predicted deeper cuts through 2025 than the Fed now anticipates.

Still, rates are much better than they were just weeks ago, providing a solid opportunity for home purchase and refinance consumers.

Pluse, long-term mortgage rates are looking favorable: the most powerful financial body in the U.S. and arguably the world still projects significant rate cuts over the coming 16 months.

Why Is The Fed Cutting Now?

The Federal Open Market Committee, or FOMC, first started hiking rates in March 2022 due to rising inflation after the COVID-19 pandemic. Economic stimulus as well as supply chain issues drove up prices for everyday items.

Inflation hit a four-decade high of 9.1% in June 2022. In other words, an item that cost $100 in June 2021 would cost $109 a year later. That’s far above the Fed’s 2% target.

The Fed would go on to keep rates high for 13 months. That plan has worked so far to curb inflation. By August 2024, the Consumer Price Index (CPI) fell to 2.5%.

But that plan outlived its usefulness. "The time has come for policy to adjust," said Fed chair Jerome Powell in August at an annual meeting in Jackson Hole, Wyoming.

There’s a risk of keeping rates too high for too long, which is why the Federal Reserve is cutting now. If the rate environment is too restrictive, businesses suffer, and unemployment rises. High unemployment can feed on itself, reducing demand in the economy and causing further job losses.

Some believe the Fed may have been late to act.

"A cut of this magnitude indicates that the Fed may have waited too long to start easing," said Emily Overton, Capital Markets Manager for Veterans United Home Loans Mortgage Research Center is Veterans United's parent company). "For his part, Chairman Jerome Powell defended the timeline and said the Fed wasn’t playing catch up."

The Fed wants to find a happy medium: low inflation and maximum employment.

Are More Rate Cuts Coming?

This was an important meeting in more ways than one.

It delivered the first rate cut in four and a half years and also a document that reveals the Federal Open Market Committee (FOMC) predictions for future rate cuts.

The FOMC issues a projection document about every three months. It contains the famous “dot plot” which shows a dot for each Fed member’s prediction for the federal funds rate.

Today’s dot plot shows the Committee predicts another 0.25-0.50% in cuts for 2024. There are two more planned meetings for 2024 in November and December. That could mean a 0.25% cut at one or both upcoming meetings this year.

Additionally, the group forecasts an additional 1.0-1.25% in cuts throughout 2025.

In all, the Fed predicts a total 2.0-2.25% reduction from today's pre-cut level. That would be roughly the same as October 2022 levels, but not going as low as pre-COVID levels in 2019.

Where Will Mortgage Rates Go in 2025?

While the Fed doesn’t control mortgage rates, it can influence them by setting an overall tone for the economy.

Deeper rate cuts are good for most borrowing rates in the economy including those for mortgages.

While it’s impossible to tell where rates will be in late 2024 and early 2025, major agencies offer forecasts for the 30-year fixed mortgage rate.

There seems to be a consensus among housing authorities that mortgage rates will be in the high 5s or low 6s starting in 2025.

But rates could go lower or higher. In fact, Freddie Mac already reports an average rate of 6.2% nationwide, meeting Fannie Mae’s 2025 prediction early. What is clear is that rates will likely bounce around. The key is being ready to buy when mortgage rates are in a valley, not a peak.

Is It Time to Buy or Refi?

Rates are lower than they have been for most of the past two years. Home buyers have little reason to wait: as rates drop, home prices could rise.

But for current homeowners, rates could fall further, inducing them to refinance multiple times. This might be unwise because they have to pay closing costs each time. It could be better to wait.

However, households with a high mortgage rate and a tight budget might benefit with a refinance now.

Why Is The Fed Cutting Now?

The Federal Open Market Committee, or FOMC, first started hiking rates in March 2022 due to rising inflation after the COVID-19 pandemic. Economic stimulus as well as supply chain issues drove up prices for everyday items.

Inflation hit a four-decade high of 9.1% in June 2022. In other words, an item that cost $100 in June 2021 would cost $109 a year later. That’s far above the Fed’s 2% target.

The Fed would go on to keep rates high for 13 months. That plan has worked so far to curb inflation. By August 2024, the Consumer Price Index (CPI) fell to 2.5%.

But that plan outlived its usefulness. "The time has come for policy to adjust," said Fed chair Jerome Powell in August at an annual meeting in Jackson Hole, Wyoming.

There’s a risk of keeping rates too high for too long, which is why the Federal Reserve is cutting now. If the rate environment is too restrictive, businesses suffer, and unemployment rises. High unemployment can feed on itself, reducing demand in the economy and causing further job losses.

The Fed wants to find a happy medium: low inflation and maximum employment.

Are More Rate Cuts Coming?

This was an important meeting in more ways than one.

It delivered the first rate cut in four and a half years and also a document that reveals the Federal Open Market Committee (FOMC) predictions for future rate cuts.

The FOMC issues a projection document about every three months. It contains the famous “dot plot” which shows a dot for each Fed member’s prediction for the federal funds rate.

Today’s dot plot shows the Committee predicts another 0.25-0.50% in cuts for 2024. There are two more planned meetings for 2024 in November and December. That could mean a 0.25% cut at one or both upcoming meetings this year.

Additionally, the group forecasts an additional 1.0-1.25% in cuts throughout 2025.

In all, the Fed predicts a 2.0-2.25% reduction from the fed funds rate before today's cut. That would be roughly the same as October 2022 levels, but not going as low as pre-COVID levels in 2019.

Where Will Mortgage Rates Go in 2025?

While the Fed doesn’t control mortgage rates, it can influence them by setting an overall tone for the economy.

Deeper rate cuts are good for most borrowing rates in the economy including those for mortgages.

While it’s impossible to tell where rates will be in late 2024 and early 2025, major agencies offer forecasts for the 30-year fixed mortgage rate.

There seems to be a consensus among housing authorities that mortgage rates will be in the high 5s or low 6s starting in 2025.

But rates could go lower or higher. In fact, Freddie Mac already reports an average rate of 6.2% nationwide, meeting Fannie Mae’s 2025 prediction early. What is clear is that rates will likely bounce around. The key is being ready to buy when mortgage rates are in a valley, not a peak.

Is It Time to Buy or Refi?

Rates are lower than they have been for most of the past two years. Home buyers have little reason to wait: as rates drop, home prices could rise.

But for current homeowners, rates could fall further, inducing them to refinance multiple times. This might be unwise because they have to pay closing costs each time. It could be better to wait.

However, households with a high mortgage rate and a tight budget might benefit with a refinance now.