It’s a big week for the US economy as the 2024 election takes place and monetary policymakers come together to decide what to do next on interest rates.
For mortgage professionals who have been dealing with uncertainty lately, more clarity may soon emerge. Mortgage prices have risen rapidly in recent weeks, dashing hopes of growth across purchase lending and refinancing channels.
According to the Mortgage Price Center affiliate, the 30-year average match rate was 6.88% on Tuesday. That figure jumped by 16 basis points (BPS) over the past week, 26 basis points in the past two weeks and 57 basis points since Sept. 18, when the Fed cut benchmark interest rates by half a percentage point.
Meanwhile, the 15-year average match rate rose to 6.55% on Tuesday – a staggering 27 basis points increase in one week. Conditions are not expected to improve in the short term.
“Mortgage rates are trending up unless the spreads are great today,” he wrote on Tuesday. “The election data will create some wild volatility, but the Supply Management Institute’s services report was significantly outperformed estimates, making returns higher this morning after the report was released.”
The Fed is expected to provide some help on Thursday with another rate cut. About 95% of interest rate traders believe the Fed will cut the federal funds rate by 25 basis points. Traders see a 77% chance of another 25-basis point cut in December, which would raise the overnight interest rate to a range of 4.25% to 4.5%.
Sam Williamson, chief economist at First American, said in a statement: “Assuming a 25 basis point cut in November, the FOMC’s forecast for September means an additional quarter-point cut in December.”
Expectations of a rate cut from the Federal Reserve
The Fed is set to cut interest rates by 0.25% on Thursday, cutting rates to 4.5%-4.75%. Powell’s dovish tone can raise risky assets; a cautious stance may increase market volatility.
Few things seem certain in life ahead of the results of the US presidential election: death, taxes and the Federal Reserve’s rate cut on Thursday.
As the U.S. eagerly awaits the outcome of one of the toughest presidential races in history — which may be too close to speculating by Thursday — this expected rate cut could provide a rare anchor for financial markets, providing traders with a moment of stability during what could be a highly volatile week.
The central bank will likely cut its benchmark interest rate by 0.25%, lowering it to a range of 4.5%-4.75%. Analysts widely view this move as guaranteed. The move will bring borrowing costs down to their lowest levels since February 2023.
The market assumes a 0.25% rate cut, which points to a 97.4% probability. This effectively prices in a rate cut, marking the Fed’s second consecutive reduction.
The Fed will release its policy statement on Thursday, followed by a press conference with Chairman Jerome Powell. Investors will look for clues about the Fed’s expectations for cutting interest rates again at the year’s final meeting.
Polish currency fluctuations and rising domestic interest rates also discourage cuts. However, some economists suggest that price cuts could support economic recovery, given slower growth and weak consumer demand despite rising wages.
Lowering prices may help curb the rising cost of credit, hindering investments and economic activity, especially in sectors such as real estate.
Labor market and inflation trends drive the Fed’s decision
Bank of America interest rate analyst Mark Cabana said: “We expect the Fed to cut rates by 25 basis points in November, and President Powell’s message is likely to remain upbeat.”
Cabana explained that the weaker-than-expected jobs report in October and the downward revision of payroll data for previous months were the main factors that led to the rate cut in November. Bank of America notes that recent business data significantly increases the odds of a rate cut in December.
David Merkel, an economist at Goldman Sachs, welcomed the latest inflation development and stressed that while October’s employment report was tepid, other data points to the resilience of the US economy.
“Better inflation news has eased concerns about re-acceleration or consolidation from the first few months of the year,” he said. Merkel also highlighted strong GDP growth in the third quarter, which may ease concerns about an overly weak labor market.
Goldman Sachs expects four additional cuts in the first half of next year, which would bring the final price down to the range of 3.25%-3.5%. However, Merkel noted that there is “more uncertainty about speed in the coming year and the final destination,” suggesting that future decisions will depend heavily on incoming economic data.
JPMorgan agrees with the consensus of a 25 basis point cut in November, with the possibility of another cut in December if economic conditions remain stable. However, the bank warns that labor market data will play a big role in shaping the Fed’s future moves.
Analysts at the largest U.S. bank have warned that if the unemployment rate falls below 4% in December, the Fed may consider skipping a rate cut in early 2024 — a prospect last raised by Atlanta Fed President Rafael.
