Senior economist sees a couple of paths to future rate cuts
If this week’s meeting of the Federal Reserve’s Federal Open Market Committee (FOMC) were happening at any other time, it might not be very newsworthy.
Despite some of the geopolitical turmoil that caused rate volatility over the last couple of months, the 30-year mortgage rate has steadied near 6.3%. Core inflation, while still elevated, doesn’t seem to be out of control.
The job market continues to be in a general ‘low hire, low fire’ environment, although corporate layoffs are becoming more frequent.
While all of those factors seem to be leading to yet another Fed hold, this meeting is newsworthy for many other reasons. First, it could be the last time to see Jerome Powell hold the position of Fed chair. With the federal investigation into the Fed’s renovations being dropped last week, it is expected that Kevin Warsh will be confirmed as Powell’s replacement.
All eyes and ears will be on what Powell says in the immediate aftermath of the rate decision. Will he give any clues as to whether he will stay on the Fed board after his term as chair is over?
Powell’s future, possible dissents, and any clues as to what the Warsh Fed will look like will likely be bigger headlines than the rate decision itself.
Sam Williamson (pictured top), senior economist at First American, said the Fed will still have to work its way through the uncertainty of higher energy prices.
“A calmer oil market would help clear one source of uncertainty, but it would not settle the policy question on its own,” Williamson told Mortgage Professional America. “The Federal Reserve has often looked through temporary energy shocks, but that becomes harder if higher energy prices persist or start to spill into broader prices and inflation expectations.
“At the same time, the Fed is still weighing inflation that remains above target against a labor market that has softened, but not clearly broken. Ultimately, the policy impact depends on whether the disruption proves temporary or persistent, and how it affects the broader inflation and growth outlook.”
Rates have been steady
Despite the volatility, mortgage rates have largely settled into a range between 6.3% and 6.4%. Williamson said that this should continue if investors believe the current geopolitical tension is temporary.
“Mortgage rates can remain relatively stable if markets continue to treat the recent disruption as temporary,” Williamson said. “The ceasefire has eased some near-term geopolitical risk, but investors are still deciding whether the bigger risk is renewed inflation pressure or weaker growth. Higher inflation risk would put upward pressure on Treasury yields and mortgage rates, while weaker growth concerns would tend to pull them lower.”
For brokers working with homebuyers, it may be possible to get clients to commit to a market that has shown signs of improved affordability if rates continue to stay steady or fall.
“For home buyers, the reason rates are moving is just as important as the direction they’re moving,” Williamson said. “If rates drift lower because tensions ease and financial conditions stabilize, buyers may be more willing to take advantage of improved affordability—supported by increased inventory and slower price growth—helping convert pent-up demand into sales. But, if rates fall because investors are pricing in weaker growth, lower borrowing costs may do less to unlock demand from cautious home buyers.”
When will the Fed cut?
The question remains when the Federal Reserve will consider rate cuts again. Of course, Warsh will be under pressure to cut rates, but he will have to convince a majority of the FOMC to go along with him.
Williamson said if the risks of high energy prices disappear from the market, there could be an opportunity for the central bank to consider a cut later in the year. But there are other factors at hand.
“The Fed could consider a rate cut later this year if energy-market risks fade, but the bar is not simply lower energy prices,” he said. “The cleaner path to cuts would be renewed confidence that inflation is moving back toward target and expectations remain anchored.”
There is a grimmer path to rate cuts, and that would be a weakening of the jobs market. There have been AI-related layoffs affecting white-collar workers. If layoffs increase, that could force the Fed to consider more rate easing.
“The alternative path would be a clearer labor-market deterioration, especially a sustained rise in unemployment, that shifts the balance of risks toward growth,” Williamson said. “Without one of those two signals, policymakers are likely to stay cautious.”
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