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Speaking from Jackson Hole on Friday, Fed Chair Jerome Powell made it clear that he has seen enough and is ready to pivot into the start of the rate-cutting cycle.
“The cooling in labor market conditions is unmistakable . . . We do not seek or welcome further cooling in labor market conditions . . . It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon,” Powell said on Friday. “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data.”
The Federal Reserve has a dual mandate from Congress: maintain “maximum employment” and “stable prices.” Since March 2022, the Fed’s focus has been on the latter (inflation). However, starting in September 2024, when the Fed is expected to make its first rate cut, the focus will shift to the former (employment).
The average 30-year fixed mortgage rate tracked by Freddie Mac (6.46%) has already come down a clip from last October’s cycle high (7.79%).
Will the start of the Fed’s rate-cutting cycle in September mean mortgage rates will fall further?
Before we try to address that question, keep in mind that while the Federal Reserve directly sets the short-term federal funds rate, long-term yields, including mortgage rates, are not directly set by the Fed. Long-term yields can move in anticipation of future economic and monetary conditions. Indeed, Powell’s dovish comments did not lower mortgage rates on Friday, suggesting that the start of the Fed’s rate-cutting cycle has already been priced in.
Looking ahead, most analysts expect mortgage rates to gradually come down a bit; however, without a recession, the decrease might not be as significant as some industry professionals, homebuyers, and home sellers would like.
On Friday, Moody’s chief economist Mark Zandi reaffirmed his 2025 mortgage rate outlook, which he has held since fall 2022.
“I expect the 30-year fixed mortgage rate will be closing in on 6.0% by the end of the year and settle in near 5.5% by the end of 2025,” Zandi tells ResiClub. “The decline in mortgage rates is due to a narrowing in the spread with the 10-year Treasury yield as the Fed eases policy, the yield curve becomes normally sloped and bond volatility declines, and pre-payment risk normalizes.”
The big thing to watch: Labor market data.
If the labor market begins to cool faster than expected and unemployment spikes, short-term and long-term interest rates could fall faster than expected. Conversely, if the labor market tightens up, we could get fewer cuts than currently expected.