The Federal Reserve’s decision to leave interest rates unchanged yet again last week came as no surprise – but more significantly, the central bank signaled that just one rate cut is likely on the way in 2024, a dramatic dialing-back from expectations earlier in the year.
In March, multiple rate cuts were anticipated from the Fed, with the central bank then expected to bring rates lower three times by the end of December.
That optimism has vanished. Lingering inflation and a surprisingly strong economy have seen the Bank leave rates where they are throughout the year to date, and in its June announcement there was no unanimity from central bank decisionmakers on the path ahead.
The Fed’s so-called “dot plot” indicated that seven officials anticipate one rate cut this year, with eight expecting two and four believing rates won’t fall at all in 2024.
For Melissa Cohn (pictured top), regional vice president of William Raveis Mortgage, the Fed’s language reflected its continuing “hawkish” approach to interest rates and general dissatisfaction with progress on the inflation front.
“[Chair Jerome Powell] basically is maintaining that same rhetoric that interest rates need to remain higher for longer,” Cohn told Mortgage Professional America, “that they need greater confidence or greater evidence that the rate of inflation is continuing to diminish and until such time that they feel they have this greater evidence, they’re not going to get ready to cut rates.”
For Fed, labor market represents continuing cause for concern
There was some cause for optimism with an inflation reading just hours before the Fed’s announcement showing the consumer price index (CPI) ticked downwards in May, suggesting slow but steady movement in the right direction.
Still, Cohn said the Fed will also be concerned with the resilience at play in the labor market, which has continued to operate at a solid clip despite the central bank’s spate of rate hikes in 2022 and 2023.
“Employment has outperformed. And look at the number we got on Friday (June 7), with 272,000 new jobs created,” she said. “Yes, the previous month’s numbers were reduced lower, but that was still a much stronger number than anyone was expecting.
“My sentiment would be that we need to be pleasantly surprised with weaker economic data and more modest job gains before we’re going to see the Fed feel confident and comfortable enough in order to enact a rate cut.”
The good news for borrowers: the Fed appears to have firmly ruled out the prospect of further rate hikes despite the economy’s unexpected strength.
“[Powell] did say that no-one is expecting for there to be any further rate hikes,” Cohn said. “There’s been talk back and forth in the press over the course of the past few weeks about the potential, perhaps, for having to have a rate hike. So the fact that that is effectively off the table at the moment is at least a good sign.”
Could the Fed really leave rates where they are for the rest of the year?
The answer to when the Fed’s expected one rate cut of 2024 will take place remains unclear. Cohn’s expectation is at some point between September and November, although she cautioned that the impending presidential election may convince the Fed to wait until after November 5 to make its move.
That’s not to say the Fed’s approach will be the only influence on where mortgage rates are headed between now and the end of the year.
“Mortgage rates can drop without the Fed actually cutting rates. Once they say they’re getting closer to a comfort level, the markets will rally,” Cohn said. “It’s all about the data.
“If we get more subdued jobs numbers, if we see there are more jobless claims filed, if we see that retail sales are coming down, that can all push mortgage rates down without the Fed ever having to actually cut rates.”
However, the scenario of no rate cuts at all by the end of the year – an unthinkable prospect at the beginning of 2024 – is also one that’s becoming a very real possibility.
Cohn said the Fed would be in no hurry to bring rates lower if the labor market continued to show its strength and inflation remained steady.
“If we continue to get stronger than expected economic data, then we shouldn’t be surprised [if rates stay unchanged],” she said. “I think the way to deal with it is that we need to have low levels of expectations and be pleasantly surprised when [a cut] happens.”
