In the just-released FOMC statement, the Fed announced a 0.25% cut to the Fed funds rate. This lowers the Fed funds range to 3.75% to 4.00% and is the second consecutive cut. This was expected by the market.
Today’s meeting does not come with a refresh of dot plot projections, so outside of any changes to the policy statement itself, the “news” today will come from Chair Powell’s press conference. There will be three major topics in terms of the questions Powell will face today: quantitative tightening, potential for a December rate cut, and the government shutdown.
First, has the Fed decided on discontinuing quantitative tightening (QT)? That is, will the Fed begin reinvesting all the payment and maturity cashflow from its SOMA bond portfolio? The market expects this announcement today. The current ongoing quantitative tightening was mentioned in previous policy statements, so this change will be evident as soon as the policy statement announcing the rate cut is released.
This change brings a possibility of a drop in term rates. But since the MBS portion of the portfolio is expected to continue to be reinvested in Treasury debt (not MBS), the impact on term mortgage rates may be muted compared to Treasury yields. This topic has gotten more attention recently, so expect press conference questions on it regardless of the policy statement.
Second, do the recent modest CPI numbers allow for a December rate cut? In other words, will the slower employment market relative to less-than-expected tariff inflation lead the Fed to continue consecutive rate cuts towards a neutral Fed funds rate? The market (Fed funds futures trading) has already priced this in. It’s expected Powell will not fully commit to a December cut today. If he does say the FOMC is planning a December cut, term mortgage rates could move lower in response.
Finally, how much uncertainty will the continuing government shutdown and lack of fresh economic indicators cause for the Fed going forward? How could it affect future rate decisions? However Powell addresses this, the market will have its own take, and until the government re-opens, this will play into rate volatility.
There are many other areas Powell may be asked about, but these concerns have the greatest potential to impact term mortgage rates between today and the December meeting. Will Powell repeat his conservative comments from the September meeting where he said that the cut was a “risk-management cut” and “we’re in a meeting-by-meeting situation”? A good benchmark to measure the market’s reaction to Powell’s tone today is the 4.0% yield level on the 10yr Treasury. A hawkish (inflation-concerned) emphasis by Powell will see that yield move over 4.0%.
What’s Next?
Until reaching an agreement to reopen the federal government and getting caught up on economic indicators, markets will face mounting uncertainty. The December FOMC meeting has another rate cut already priced into forward settlement term mortgage rates. Any changes to that expectation today and the mounting uncertainty from a lack of data, especially relating to the employment situation, will certainly add volatility to rate markets.
While the tariff war has by and large run its course, with the notable exception of China (which may be resolved tomorrow when Trump and Xi meet), its longer-term impact on inflation is still not fully known. On the employment front, the impact AI is having on employment is gaining more and more attention, making the release of employment numbers of even greater importance. These factors will keep the “data dependency” mantra by the Fed alive and inject risk into markets.
The jobs market is slowing, and AI pressure is mounting, but the unemployment rate is still historically low. As mentioned, until the government re-opens, the market will be left to consider other sources of employment information. Continuing slowing will force the Fed to keep rate cuts coming and will keep bringing term rates down with it.
What Do Borrowers Do Now?
Originators should explain to borrowers looking to finance the purchase of a home that even as term rates are expected to fall, the current mortgage rate market remains exposed to greater-than-typical levels of uncertainty within the typical rate lock period. Inflation remains the wild card, with the impact of tariffs still working its way into consumer pricing. Any acceleration in inflation will push term mortgage rates higher with it.
Certain local markets have seen declines in value, but as rates move down, that dynamic will change. And despite increases in available inventory, relative to the longer-term need for housing, there remains a shortage of homes for years to come. The math on making a home purchase sooner rather than waiting for expected lower rates favors the earlier purchase and opportunity to begin building equity.
A borrower isn’t looking to purchase a market trend or an inventory level. At a point in time, they are looking for a home that will meet their needs now and far into the future. After finding a home for purchase and achieving an accepted offer, the best course of action is to secure financing quickly to avoid possible market volatility that could upend those plans.
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