On September 18th, the Federal Reserve made the decision to cut interest rates, lowering the federal funds rate to a target range of 4.75% to 5%, with the effective rate at 4.875%. This is an important move, but it's crucial to understand that the Fed is not directly cutting mortgage rates - rather, they are adjusting the overnight rate at which banks lend to one another.
This change in the federal funds rate has a direct impact on short-term rates like credit cards, car loans, personal and business loans, and short-term treasuries. However, its effect on mortgage rates is more indirect. In the past, rate cuts have sometimes led to higher mortgage rates, as the increased spending power of consumers can be seen as inflationary.
But the current situation is a bit different. The Fed has been extremely restrictive, raising rates by a total of 525 basis points to 5.375% before finally cutting by 50 basis points on September 18th. With core PCE inflation, their preferred measure, sitting at 2.6%, they could potentially cut rates even further while still maintaining a relatively restrictive stance on the economy.
The Fed's decision to cut rates signals that they feel inflation is now under control. Their forecast is for inflation to continue declining, reaching 2.25% by next year. This is good news for mortgage rates, as long-term interest rates like mortgages are heavily influenced by inflation expectations. Additionally, the Fed's projection of a rise in the unemployment rate to 4.4% this year could also contribute to lower mortgage rates, as recessionary conditions often lead to rate decreases.
The general consensus is that mortgage rates will continue to trend lower, though the path may not be a straight line. This raises the question many homeowners are asking: should I refinance now, or wait? The answer depends on the specific savings versus the closing costs associated with a refinance. It's important to keep in mind that mortgage brokers who originated a loan could face penalties if that loan is refinanced again within 180 days. So, make sure the savings will justify holding the loan for at least six months to a year.
In summary, the Fed's latest rate cut, while not directly impacting mortgage rates, does signal a shift in their approach to controlling inflation. This, combined with their forecasts for continued inflation decline and a rise in unemployment, suggests that mortgage rates may continue to trend lower in the coming months, albeit with some volatility along the way. As always, it's crucial to carefully evaluate your individual situation when considering a refinance.
If you are considering a refinance, give me a call and we can run the numbers to see if it makes sense to refinance now or wait.
Comments