The Federal Reserve’s Messaging Signals Possible Rate Cuts
Original Article By Arnie Aurellano, Scotsman Guide Inc.
For those closely watching the Federal Reserve, Chair Jerome Powell’s recent statements provided a rare glimpse into potential policy changes. Speaking at an economic symposium hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming, Powell remarked, “The time has come for policy to adjust.”
Powell’s comments indicated that the Fed’s stance on rate cuts is becoming clearer: “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” While he didn’t explicitly announce a rate cut for September, his comments marked a significant shift for a typically cautious central bank leader.
Powell’s mention of “confidence,” a term he has frequently used to describe the Fed’s requirements for enacting rate cuts, further underscored this shift. After the July meeting of the Federal Open Market Committee, Powell hinted that some of this confidence had already been realized, a sentiment he nearly confirmed in his recent speech.
“Our restrictive monetary policy helped restore balance between aggregate supply and demand, easing inflationary pressures and ensuring that inflation expectations remained well anchored,” Powell stated. “Inflation is now much closer to our objective, with prices having risen 2.5% over the past 12 months. After a pause earlier this year, progress toward our 2% objective has resumed. My confidence has grown that inflation is on a sustainable path back to 2%.”
This is particularly significant for the mortgage industry, which has been eagerly awaiting more favorable economic signals from Powell and the Fed. Mike Fratantoni, chief economist and senior vice president at the Mortgage Bankers Association, interpreted Powell’s speech as a clear indicator of upcoming rate cuts. He noted that while Powell emphasized the importance of incoming data in shaping the pace of the rate-lowering cycle, there is confidence that this will mark the start of a series of reductions in the Fed’s benchmark rate. Fratantoni suggested that the mortgage market could soon react positively.
“The immediate reaction to the speech resulted in some reductions in longer-term Treasurys and secondary mortgage market yields,” Fratantoni observed. “So mortgage rates may be somewhat lower in the near term. Our forecast continues to look for mortgage rates to drift down closer to 6% over the next 12 months or so.”
With this potential shift, attention now turns to the extent, speed, and frequency of any upcoming rate cuts, as well as their impact on mortgage rates. Melissa Cohn, regional vice president of William Raveis Mortgage, highlighted the importance of the Fed’s messaging in influencing market reactions. “I think it’s more the message that the Fed sends to the markets, and how the markets react to what that message is, that will determine the fate of mortgage rates,” she said.
Cohn also noted an increase in consumer activity and optimism in the real estate market, saying, “Mortgage rates have [already] dropped, and people seem to be in good spirits. And there’s more activity of people renewing their interest in getting back into the real estate market.”
She added that many homeowners who secured mortgages at peak rates over the past 18 months are now considering refinancing. “I’ve heard from a lot of people who locked in over the course of the past 18 months, when rates were at their peak, already asking whether it’s time to refinance and what savings they could have. I think that the outlook is good, and hopefully, that spills into the real estate market, and we get more buyers in the market.”
Original article by Arnie Aurellano, Digital News Editor at Scotsman Guide Inc.