Fixed-income markets are expecting the Federal Reserve to cut interest rates at its next meeting in September following Fed Chair Jerome Powell's declaration last week.
The Fed hiked its interest rate in 2022 and 2023 as part of an effort to calm inflation. The hikes led to soaring costs for Americans deciding to borrow money or take out credit.
However, markets are now expecting the Fed to cut its benchmark rate at its next meeting on September 18 following a series of evidence and statements from the economic institution, per Forbes. For instance, Fed Chair Powell strongly hinted that the central bank is ready to bring interest rates down from a 23-year high during a speech at the Kansas City Fed's annual conference at Jackson Hole in Wyoming.
"The time has come for policy to adjust," he said, as quoted by The New York Times. "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."
It is unclear how big of a cut the Fed plans to make. It could be a typical cut of a quarter-point or a larger half-point cut.
Other Evidence Pointing to a Possible Rate Cut
In addition to Powell's declaration, minutes from the FOMC's July meeting also teased a possible rate cut in September.
"All participants supported maintaining the target range for the federal funds rate at 5¼ to 5½ %, although several observed that the recent progress on inflation and increases in the unemployment rate had provided a plausible case for reducing the target range 25 basis points at this meeting or that they could have supported such a decision," the minutes read.
How a Rate Cut Impacts Mortgage Rates
The Fed's interest rate does not directly influence mortgage rates. However, they affect other factors in the financial market. For example, the cost of borrowing generally falls after a reduction in interest rates, which can later translate to lower rates for consumers such as those seeking mortgages. Lower interest rates could also boost confidence in the housing market and increase demand for homes. This increase in demand may put downward pressure on mortgage rates as lenders compete to attract more borrowers.
That being said, experts say subsequent drops in mortgage rates would unlikely be significant should the Fed cut its interest rate in September. Some believe a 0.25% Fed rate cut could bring down mortgage rates by at least 0.50%.
