Fed Expected to Signal Rate Reduction

The Federal Reserve is expected to signal a potential interest rate cut as soon as September, marking a significant shift in policy and a potential boost to the economy.

Why it matters: Fed rate cuts typically lower borrowing costs for mortgages, auto loans, and credit cards, which could provide relief to consumers and stimulate economic growth.

The details:

• Futures markets have priced in a 64% likelihood of three rate cuts this year, in September, November, and December.
• The pace of rate cuts will depend on the economy’s performance, with the Fed preferring a gradual approach if growth remains solid and employment stable.
• Signs of a cooling labor market, as intended by the Fed, are emerging, but it remains unclear whether this reflects a sustainable post-pandemic period or a potential slide into recession.

The Fed’s statement after this week’s meeting may hint at an upcoming rate cut by altering language about progress towards the 2% inflation objective.

What they’re saying:

• “They want to be very gradual in how they pull back. But if the labor market actually looks like it’s slowing down, Fed officials might conclude that they should be moving a little bit quicker than they otherwise would.” – Gennadiy Goldberg, head of US rates strategy at TD Securities
• “The economy looks pretty solid at the moment. I don’t think there are real signs now that something bad is going to happen.” – William English, economist at the Yale School of Management and former senior Fed staffer

What’s next: Fed Chair Jerome Powell may provide a clearer picture of future rate moves at his annual speech during the Fed’s monetary policy conference in Jackson Hole, Wyoming, in August.

The first Federal Reserve interest rate cut in years is on the horizon, with experts suggesting that September is the most likely time for action.

Why it matters: Even small cuts in interest rates could make a meaningful difference in what homebuyers will pay, providing relief to those eagerly waiting to enter the market.

The details:

• The 30-year fixed-rate mortgage declined to 6.78% on July 25, down from 7.22% on May 2, according to Freddie Mac data.
• Futures market pricing suggests a high likelihood of quarter-point reductions in September, November, and December, potentially bringing the Fed’s benchmark rate below 4% by the end of 2025.
• Mortgage rates are partly influenced by the Fed’s policy, and home loan rates have already started to come down in anticipation of rate cuts.

What homeowners and buyers need to know:

• Rate cuts are already largely priced into financial markets, so mortgage rates aren’t expected to change significantly once the Fed begins cutting rates.
• Refinance activity is starting to increase as rates decline, but homeowners should consider factors like their current rate, monthly payments, and closing costs when deciding whether to refinance.
• For homebuyers, timing the market is challenging, and the decision to buy should be based on personal circumstances rather than trying to predict perfect market conditions.

The bottom line: The housing market’s future will depend on the extent of mortgage rate declines and the balance between supply and demand. Lower borrowing costs may provide relief for homebuyers, but if demand outpaces supply, prices could increase, offsetting some of the benefits.

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A big week for #CentralBanks with policy meetings in Japan, the UK, and the US.
In terms of outcomes, from most probable to the more uncertain:
The #FederalReserve will signal the likelihood of a September cut (as you know, I think that a more forward-looking Fed would/should cut…

— Mohamed A. El-Erian (@elerianm) July 29, 2024

The Federal Reserve is expected to signal this week that it will likely reduce borrowing costs as soon as September. A rate reduction this fall would be the first since the pandemic and could potentially boost the economy. Fed rate cuts typically lower borrowing costs for mortgages, auto loans, and credit cards over time.

From the @WSJ article by @NickTimiraos on this week’s #FederalReserve policy meeting:
“One reason officials aren’t likely to deliver a cut this time despite the growing case for one is that it would likely be the first reduction in a sequence to recalibrate rates lower. Officials…

— Mohamed A. El-Erian (@elerianm) July 29, 2024

A single cut in the Fed’s key rate, currently around 5.3%, wouldn’t make much difference to the economy by itself, but financial markets widely anticipate it. Some borrowing costs have already dropped slightly in anticipation of the move. The main question for the central bank will be how fast and how far policymakers will ultimately cut rates.

Truflation's real-time US inflation gauge has moved down to 1.6%, the lowest level in the past year. The market's implied probability of Fed rate cut in September: 100%.

Video: https://t.co/T6QojxPglW pic.twitter.com/qHALCkvwh2

— Charlie Bilello (@charliebilello) July 29, 2024

Futures markets have priced in a 64% likelihood that the Fed will cut rates three times this year, in September, November, and December. As recently as last month, Fed officials had collectively forecast just one cut in 2024 and four in 2025 and 2026, suggesting they lean toward a more measured pace of cutting rates about once a quarter. The economy’s performance in the coming months will likely determine how quickly the Fed acts.

There are signs that the labor market is cooling, as the Fed intended.

Signaling possible rate cuts

Job growth has averaged a decent but unspectacular 177,000 a month for the past three months, down from a red-hot three-month average of 275,000 a year ago.

Chair Jerome Powell and other Fed officials have underscored that they’re paying nearly as much attention to the threat posed by a hiring slowdown as they are to inflation pressures. This shift in the Fed’s emphasis towards ensuring the job market doesn’t weaken too much has likely boosted market expectations for a rate cut. The government reported that the economy grew at a 2.4% annual pace in the April-June quarter, though that figure followed a tepid 1.4% expansion in the first three months of the year.

This week, the Fed may change the statement it issues after each meeting in ways that could hint that a rate cut is coming soon. In June, the Fed’s policymakers had forecast that year-over-year inflation would average 2.8% in the final three months of this year. On Friday, the government said inflation had already fallen below that level, to 2.5% in June, according to the Fed’s preferred measure.

If inflation remains below the Fed’s year-end target, that could justify cutting borrowing rates more than the single reduction the policymakers forecast in June. Nonetheless, even as price pressures cool, annual inflation may not fall much more this year and could even rise a bit by the end of 2024. Fed officials are expected to focus much more on the three-month and six-month annualized inflation averages in the coming months.

The three-month average of the Fed’s preferred inflation gauge, excluding the volatile food and energy categories, fell to just 2.3% in June.