The Federal Reserve (Fed) has turned expectations into a reality, making its first interest rate cuts since the start of the pandemic.
Against the backdrop of a cooling job market and cooling inflation, all Fed officials opted to lower the federal funds rates by half a percentage point—50 basis points—to 4.75% to 5%, making a milestone move for the central bank which has been trying to tame inflation for more than four years.
“The Committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” according to the meeting summary.
Wednesday’s announcement marks the start of an easing campaign that the Fed has signaled for months as inflation has trended downward.
The latest Consumer Price Index (CPI)—a key inflation gauge—showed a 2.5% annual gain in August, within striking distance of the Fed’s goal.
Overall, recent inflation data has shown that the Fed’s rate hiking campaign that began two years ago has successfully tamed elevated inflammation levels that peaked at 9.1% in 2022.
The real question heading into the two-day meeting was how far fed officials would go in its first rate cut as they continued to aim for their coveted “soft landing,” and avoid causing a recession or pullbacks in an already tight labor market.
Pundits and speculators got their answer, as Fed Chair Jerome Powell confirmed in a post-meeting press conference that “it is time to re-calibrate our policy to something that is more appropriate given the progress on inflation.”
“The balance of risks is now even–and this is the beginning of that process, the direction of which is toward a sense of neutrality,” he said. “We will move as fast or as slow as we think is appropriate in real-time.”
In the Fed’s latest summary of economic projections (SEP) report, committee members updated their forecasts on several fronts, including the appropriate level of the federal funds rate moving forward. According to forecasts, the median participant expects rates to come in at 4.4% at the end of this year and 3.4% at the end of next year.
Longer-term inflation expectations also saw some updates as the median forecast for total PCE inflation is 2.3% this year and 2.1%—lower than projections in June 2024.
Powell remained non-committal on the Fed’s timeline or pace to lower rates. Instead, he indicated that the Fed would decide “meeting by meeting.”
“We made a good strong start to this, and that’s really, frankly, a sign of our confidence that inflation is coming down toward 2% on a sustainable basis,” Powell said. “We can make a good, strong start, and I’m very pleased that we did…but I think we’re going to go carefully, meeting by meeting, and make our decisions as we go.”
Wednesday’s rate cut came as no surprise for real estate pundits who have kept tabs on inflation and the Fed’s response, especially in recent months.
While rate cuts suggest a favorable outlook for the economy and potentially lower borrowing costs, consumers—especially homebuyers—the impacts of the Fed’s new easing campaign won’t be immediate.
“Many prospective homebuyers and sellers are watching the Fed, expecting a big drop in mortgage rates after today,” said Lisa Sturtevant Bright, MLS Chief Economist. However, much of today’s rate cut has largely been baked in, with rates on the 30-year fixed-rate mortgage falling since early July. It would be surprising to see a substantial drop in mortgage rates this week.
With mortgage rates at their lowest levels since early 2023, Sturtevant said declining interest rates are “welcome news for homebuyers who have been dealing with worsening affordability challenges,” which could also improve buyer demand along with the uptick in the inventory of homes for sale.
“Falling rates will also bring more sellers into the market,” she said. “An increase in both demand and supply this fall likely will lead to steady home prices in most local markets.”
