The Fed Rate Cut: Don’t Expect a Significant Splash in Mortgage Rates
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The Wait is Finally Over: Fed Cuts Interest Rates
The wait is finally over. For the first time since March 2020, the Federal Reserve has cut short-term interest rates.
Reducing the Federal Funds Rate
On Wednesday, Fed Chairman Jerome Powell announced the central bank would reduce the federal funds rate — what banks charge each other for overnight loans — by 0.50 percentage points to a target range of 4.75%-5%. The announcement is welcome news to a housing industry that has seen a slump in home sales over the past year and a half, mainly because of high mortgage rates.
Mortgage Rates Won’t Plummet Immediately
But anyone expecting mortgage rates to immediately nosedive due to the central bank’s actions should “hold their horses,” says Melissa Cohn, regional vice president at William Raveis Mortgage.
Will Mortgage Rates Decrease After the Fed Rate Cut?
Cohn explains that changes in the federal funds rate don’t directly affect mortgage rates. Instead, they tend to be influenced by the bond market and the yields paid to investors. Bonds, in turn, are influenced by the economy and labor market’s overall strength.
How Quickly Will Mortgage Rates Decline?
Because the reduction in rates was so widely anticipated, many lenders have already priced it into their loan offerings. Mortgage rates have dropped by more than half a percentage point over the past six weeks based on signs of a slowing economy and the expectation of a rate cut this month.
How Will Rate Cuts Impact the Housing Market?
Lower mortgage rates have already provided an improvement in affordability. Prospective buyers currently active in the market are better positioned to take advantage of declining rates and could save more than $200 a month on a $300,000 loan compared to May 2, when rates hit a year high of 7.22%.
