Will the Federal Reserve’s Rate Cut Impact Mortgage Rates?

December 19, 2024

Federal Reserve officials recently made the decision to reduce the federal funds rate by 0.25% to a new target range of 4.25% to 4.5%. This marks the third such cut this year, reflecting ongoing attempts to balance economic activity and inflation control. However, despite this seemingly significant shift, the impact on mortgage rates is expected to be minimal, if not negligible. Federal Reserve Chair Jerome Powell acknowledged the complexity of the decision, highlighting the fine line between stifling economic growth and ensuring inflation does not spiral out of control. Past adjustments included more substantial cuts of 50 basis points in September and 25 basis points in November, yet the future of rate cuts remains ambiguous and will heavily depend on incoming data and the evolving economic landscape.

Experts Weigh In on the Impact

Financial expert Dana Menard indicated that the rate cut is more likely to affect short-term financial instruments such as CDs and savings accounts, which could see a decrease in interest rates corresponding to the reduction. This development might appeal to individuals with short-term savings strategies. However, when it comes to mortgage rates, a different story emerges. Melissa Cohn of William Raveis Mortgage emphasized that the modest 0.25% reduction in the federal funds rate would hardly make a dent in mortgage rates, which currently hover around 7.13% for a 30-year fixed mortgage. She pointed out that mortgage rates are driven by economic data, and at present, these data points do not justify a significant drop in interest rates. Therefore, potential homebuyers and mortgage refinancers should temper their expectations regarding immediate relief in mortgage costs.

Long-Term Bonds and Marketplace Realities

The connection between long-term Treasury bonds and mortgage rates continues to dampen hopes for reduced residential loan rates. Calixto Garcia-Velez from BanescoUSA clarified that 30-year mortgage rates are heavily influenced by 10-year Treasury bonds. Despite the Federal Reserve’s recent rate reduction, these bonds have been trending upward, resulting in sustained higher mortgage rates. This relationship indicates that broader economic indicators and projections play a more crucial role in determining mortgage rates than short-term federal rate changes.

In summary, although the Federal Reserve’s recent rate cut may offer some relief for various consumer loans, its direct impact on mortgage rates seems limited. Data indicates that mortgage rates are largely influenced by the performance of long-term Treasury bonds and the prevailing economic conditions supporting higher interest rates. Moving forward, any substantial changes in residential loan rates will likely depend on broad economic shifts rather than on incremental adjustments by the Federal Reserve alone.

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