Fed Cuts Rates Again, Though Mortgage Rates Are Already Down

The Federal Reserve announced a 25-basis-point cut to the federal funds rate at the conclusion of its meeting on Wednesday, Oct. 29. The bankers had shifted into rate-cutting mode back in September with a crop of the same size. A basis point is one one-hundredth of a percentage point, so today’s trim amounts to a quarter of a percentage point.

The Fed doesn’t set mortgage rates, but adjusting that key short-term borrowing rate ripples outward to other interest rates. Lately, mortgage lenders have priced in the Fed’s cuts before they happen rather than waiting for the central bankers to make a move. This was certainly the case in this cycle; mortgage rates slid lower each week in October and appear headed for 6%. It’s been over three years since average 30-year mortgage rates were that low.

You’d think that would put some pep in the housing market, but home buyers haven’t exactly been jumping on these lower rates. Mortgage applications for home purchases have decreased each week so far in October, according to data from the Mortgage Bankers Association.

The central bankers have dual long-term goals: maintaining a healthy labor market and a reasonable level of inflation. Usually, when one’s a problem, the other isn’t. For example, a faltering labor market generally coincides with weaker inflation — an uncertain employment outlook tends to put a damper on consumer spending.

But lately, the Fed’s two goals have been in tension. The labor market has been showing signs of stress, while inflation remains stubbornly elevated. The Federal Reserve has one primary tool — raising or lowering the federal funds rate — and it can’t do both at once. Lowering rates can bolster employment but risks heightening inflation, while raising interest rates could tame inflation but risks slowing hiring.

This time, the Fed let inflation take the hit, mirroring their decision in September. The official rate cut announcement stated, “The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment rose in recent months.” In other words, the Fed knows very well that there may be consequences either way, but decided that right now, choosing to save the job market is the safer move.

Federal Reserve bankers aren’t the only ones who might be feeling uneasy about the economy. Regular folks may not rely on official economic data, but they’ve got plenty of their own indicators: They’re watching grocery bills go up, feeling less secure about their jobs and, of course, there’s the government shutdown. Choosing to buy a home may feel like a bold move at this particular economic moment.

“It’s not all about interest rates, right?” said Lisa Sturtevant, chief economist for Bright MLS, a mid-Atlantic region multiple listing service. “It’s about how people are feeling about their own situations and whether they want to do something big when things feel uncertain. I think that’s what’s holding people back.”

Lawrence Yun, chief economist for the National Association of Realtors, took a different tack while speaking at a press conference on Oct. 23. Looking back at recessionary periods in the 1980s and ’90s, Yun said, “we see that home sales actually rise even with job cuts happening.” His takeaway was that even in a weaker job market, mortgage rates still play a decisive role.

Some current homeowners may be in the best position to benefit from lower mortgage interest rates. Those who bought when rates were peaking have a solid opportunity to refinance. Rates below 6.25% could allow up to 3.6 million homeowners to shave at least three-quarters of a percentage point off their current mortgage rates, according to October data from mortgage technology firm ICE. Mortgage rates under 6.125% would put 5 million homeowners in that position.