The Federal Reserve implemented its third consecutive rate cut of 2024 today (December 18), reducing its benchmark federal funds rate by 25 basis points. This decision lowered the Fed's benchmark rate to a range of 4.25% to 4.50%, down from its previous range of 4.50% to 4.75%. This December adjustment follows earlier cuts in September and November, when the Fed enacted reductions of 50 basis points and 25 basis points, respectively. Since September, the federal funds rate has fallen by a full percentage point, a significant shift reflecting the Fed's evolving approach to supporting the economy.
The Fed's December rate decision reflects growing confidence in the economy's trajectory and the continued moderation of inflation pressures, despite an uptick in the inflation rate over the last few months. The big benefit of Fed rate cuts is that they can help drive down the cost of borrowing, making lending products like personal loans and home equity loans more affordable — which can be a big boon for borrowers in today's higher-rate environment. But loan rate drops aren't guaranteed to occur across the board, and for homebuyers and homeowners alike, the Fed's latest rate reduction raises important questions about the direction that mortgage interest rates could be headed in.
While any reduction in the federal funds rate typically generates optimism among borrowers, the relationship between Fed policy and mortgage rates is more complex than many realize. So what does this new Fed rate cut mean for mortgage interest rates?
What the Fed's December rate cut means for mortgage interest rates
While borrowers may be hoping that the Fed's latest move helps to lower mortgage rates, the Federal Reserve's 25 basis point rate cut is unlikely to lead to a dramatic drop. Here's why:
It's a rate reduction — but it's a modest one
The December rate cut — though a positive step — is still relatively small, especially when compared to September's more substantial 50 basis point reduction. Larger rate cuts tend to have a more immediate and noticeable impact on mortgage rates, as they create broader economic shifts that lenders respond to. For example, before September's significant 50 basis point cut, mortgage rates plunged to a two-year low.
That's not likely to happen now, though. While a 25 basis point reduction may nudge mortgage rates downward it is unlikely to produce a major drop. This is partly because lenders factor in a wide range of economic conditions when determining their mortgage offerings. So while the latest Fed rate cut may signal a favorable trend for borrowers, its effect on mortgage rates is likely to be gradual rather than transformative — and should a mortgage rate cut occur, it likely won't amount to the same percentage drop as the Fed rate cut, either.
Lenders have likely already factored in the Fed rate cut
Financial markets and lenders often anticipate Federal Reserve decisions and adjust their pricing strategies in advance. By monitoring economic data and Fed communications, lenders typically make preemptive changes to mortgage rates before an official rate cut is announced.
What this means is that by the time the December cut occurred, many mortgage lenders had already incorporated the expected reduction into their loan offerings. As a result of this proactive approach, mortgage rates are likely to show little to no immediate movement despite the Fed's announcement. For prospective homebuyers, this highlights the value of keeping a close eye on rate trends and acting promptly when favorable opportunities arise.
The Fed rate cut won't offset the other risk factors at play
While the Fed's rate decisions can impact where mortgage interest rates head, the reality is that mortgage rates are influenced by more than just the Fed's benchmark rate. Key economic indicators like inflation, unemployment and the 10-year Treasury yield also play pivotal roles in terms of how mortgage rates are determined by lenders.
For example, while there was no Fed meeting in October, mortgage rates still rose due to shifts in these other variables. This complex interplay means that while a Fed rate cut can contribute to lower mortgage rates, it is not the sole determinant. So, borrowers should remain aware of the broader economic trends that can further impact mortgage rates when evaluating their financing options.
The bottom line
While the Fed's latest rate cut represents another step in the right direction for borrowers, its direct impact on mortgage rates may be limited. After all, mortgage rates are influenced by a complex web of factors, of which the federal funds rate is just one component. For those considering a home purchase or refinance, the key takeaway is to focus on what makes sense for their ideal borrowing timeline rather than trying to time the market based solely on Fed decisions. While lower rates are generally beneficial for borrowers, waiting for perfect market conditions can be counterproductive, especially in a housing market where prices and inventory levels continue to fluctuate.
As a result, the best approach in today's unusual rate and housing market environment is to maintain a comprehensive view of your financial situation while carefully monitoring market conditions. You should also be prepared to act when opportunities arise that align with your personal financial goals. As the Fed continues to adjust its monetary policy stance, the mortgage market will likely continue to evolve, creating both challenges and opportunities.
Read more on CBS News
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