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Speaking in Jackson Hole on Friday, Fed Chairman Jerome Powell made it clear that he has seen enough and is ready to enter the beginning of a rate-cutting cycle.
“The cooling of labor market conditions is unmistakable … We do not want or accept further cooling of labor market conditions … It seems unlikely that the labor market will be a source of higher inflationary pressure anytime soon,” Powell said on Friday. “The time has come to prepare the policy. The path forward is clear, and the timing and speed of rate cuts will depend on incoming data.”
The Federal Reserve has a two-fold responsibility from Congress: to maintain “high activity” and “stable prices.” As of March 2022, the Fed is focusing on the latter (inflation). However, starting in September 2024, when the Fed is expected to cut its first rate, the focus will shift to the front (employment).
The average 30-year mortgage rate tracked by Freddie Mac (6.46%) is already down a fraction of the previous October cycle high (7.79%).
Does the start of the Fed’s rate-cutting cycle in September mean mortgage rates will drop further?
Before we try to answer that question, remember that although the Federal Reserve directly sets the rate of short-term federal funds, long-term yields, including mortgage rates, are not directly set by the Fed. Long-term yields can move in anticipation of future economic and financial conditions. Indeed, Powell’s ambiguous comments did not lower mortgage rates on Friday, suggesting that the start of the Fed’s rate-cutting cycle is already priced in.
Looking ahead, most analysts expect mortgage rates to decline gradually; however, without a recession, the decline may not be as significant as some industry experts, home buyers, and real estate sellers would like.
On Friday, Moody’s chief economist Mark Zandi reaffirmed his 2025 housing rate outlook, which he has held since 2022.
“I expect that the 30-year mortgage rate will close at 6.0% at the end of the year and reach 5.5% at the end of 2025,” said Zandi. ResiClub. “The decline in mortgage rates is due to a narrowing of the 10-year Treasury yield spread as Fed policy eases, the yield curve tends to flatten and bond volatility decreases, and prepayment risk normalizes.”
The big thing to watch: Labor market data.
If the labor market begins to cool faster than expected and unemployment rises, short-term and long-term interest rates may fall faster than expected. Conversely, if the labor market tightens, we may experience fewer cuts than currently expected.
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