Investors funding many mortgages are already pricing in some rate cuts, so further declines could depend on what next week’s “dots patch” says about expectations for the pace of future rate cuts.
Whether it’s adjusting your business model, mastering new technologies, or finding strategies to gain the next market advantage, Inman Connect New York will prepare you to take the next step. The Next Chapter is about to begin. Be a part of it. Join us and thousands of real estate leaders Jan. 22-24, 2025.
The Federal Reserve is expected to begin cutting rates next week, and new data that adds some credence to arguments that the economy is slowing could make policymakers more inclined to start with bolder action.
Stocks posted broad-based gains this week as investors braced for the Fed to cut short-term rates by 50 basis points on September 18, instead of dipping its toe into the water with a cautious 25 basis point cut. . A basis point is one hundredth of a percentage point.
But many mortgage-backed investors are already pricing in several Fed rate cuts this year and next, and whether mortgage rates continue to fall may depend on the release of next week’s “dots chart” that shows policymakers’ expectations for the pace of future rate cuts.
The CME FedWatch tool, which tracks futures markets to gauge investor sentiment about future Fed moves, on Friday cut the odds of a 50-point cut on Sept. 18 to 45 percent, up from 15 percent on Wednesday.
Shifting bets in futures markets followed Thursday’s release of the Producer Price Index (PPI), which tracks the price of goods and services sold, and the first weekly jobless claims.
Both Thursday’s data releases supported the view that the sharp decline in inflation seen in recent months is not a passing thing – in contrast to the sharp increase in prices in August, revealed in the latest Consumer Price Index (CPI) report.
Wednesday’s CPI report showed that core inflation, excluding variable energy and food prices, rose 3.26 percent from a year ago in August, driven by higher spending on accommodation, airfare, car insurance, education and clothing.
But the Fed’s preferred gauge of inflation is the personal consumption expenditures (PCE) price index, which registered annual growth of 2.5 percent in July — half a percentage point above the Fed’s 2 percent target.
Thursday’s PPI report has a big impact on markets because it will be used to calculate the August PCE price index, which is scheduled for release on September 27.
Economists at Pantheon Macroeconomics said on Friday they still expect the Fed to cut the federal funds rate by just 25 basis points next week.
But the latest PPI and CPI data point to inflation falling below the Fed’s 2 percent target in the second quarter of 2025, which should enable the Fed to ease more as unemployment rises, Pantheon economists said Friday in their latest report. US Economic Monitor.
Frivolous claims are on the rise
Thursday’s jobs report showed that jobless claims rose slightly last week, to 230,000, still below July’s average of 240,000.
But economists at Pantheon think the high level of claims in July “is mainly due to the disruption caused by Hurricane Beryl and the above-normal volume of car plant closures for recycling.”
In addition, employers created only 142,000 jobs last month, and “job growth will continue to slow if, as we expect, a combination of tighter credit conditions and slower growth in real household costs weigh heavily on hiring,” Pantheon said. economists predict.
Mortgage rates have been falling all summer
Rate lock data tracked by Optimal Blue shows that since hitting a 2024 high of 7.27 percent on April 25, rates on the 30-year fixed-rate mortgage have fallen more than a percent. Rates for a 30-year mortgage touched a new 2024 low of 6.10 percent on Wednesday, with borrowers looking to lock in FHA mortgage rates at an average of 5.92 percent.
But whether mortgage rates continue to fall may depend on “a wealth of dots” – the Summary of Economic Forecasts the Fed will publish Thursday reveals how much each member of the Federal Open Market Committee thinks rates should fall in the coming months.
Investors in futures markets are betting that short-term rates will fall by at least 2.25 percent by mid-2025, and many mortgage-backed investors are already pricing in the expected return they will receive for mortgage-backed securities (MBS).
Although Pantheon forecasters expect a moderate rate cut next week, they see the Fed continuing to bring short-term rates down aggressively in the coming months, at a rate of 2.75 percent over the next year.
Given that much of the Fed’s expected tapering has already been factored into long-term interest rates, Pantheon expects the yield on 10-year Treasury notes — a reliable indicator of where mortgage rates are headed next — to drop to just 58 percent. points at the same time.
Mortgage rates may have more freedom to fall, however, as the “spread” between the 10-year Treasury yield and 30-year fixed-rate bonds continues to narrow as MBS investors become less concerned about prepayment risk.
Get Inman’s Mortgage Brief Newsletter delivered to your inbox. A weekly roundup of all the world’s biggest mortgage news and foreclosures delivered every Wednesday. Click here to register.
Email Matt Carter
