The latest federal-funds rate cut was in line with long-term forecasts that said it could lead to attractive mortgage terms during 2025. But it came with more hesitancy than in the past as monetary policy officials decreased the number of reductions anticipated next year to two rather than four.
"Today was a closer call, but we decided it was the right call," said Federal Reserve Chairman Jerome Powell during a press conference on Wednesday's 25 basis point cut.
Lenders had already accounted for the current fed funds cut and
"Expectations that the Fed will cut rates less than had been anticipated have been priced into the market in the form of higher 10-year Treasury and higher mortgage rates in recent weeks," said MBA Chief Economist Michael Fratatoni.
That suggests there will be little immediate change in the cost of home financing, according to Eric Orenstein, a senior director at Fitch Ratings.
"Inflation risks have kept Treasury yields higher even with the Fed's third consecutive rate cut," he said.
The 10-year Treasury yield rose 11 basis points, much of that after the FOMC announcement, to close at 4.49%.
"The comments and tone of the meeting contradicted previous forecasts of more aggressive cuts causing pressure directly on bonds," said Phil Crescenzo Jr., vice president of the Southeast division at Nation One Mortgage Corp., noting that this resulted in lenders having to adjust pricing for the worse multiple times during the day.
The increased uncertainty around an immediate mortgage rate drop could nevertheless spur some new origination activity.
"For homebuyers who may have been waiting for mortgage rates to fall, this is a strong signal to come off the sidelines and avoid trying to time the interest rate market," said Emanuel Santa-Donato, senior vice president and chief market analyst at Tomo Mortgage.
There still could be reductions in mortgage rates next year but the pace and extent to which they occur will likely be limited.
"A more cautious approach of Fed monetary easing will keep borrowing costs higher for longer across the economy," First American Senior Economist Sam Williamson said in an emailed statement.
Williamson anticipates mortgage rates will eventually fall to around 6% or so by yearend, while the MBA is projecting the number could be closer to 6.5%. Others think rates could even be higher.
"Rates will be closer to 7% than 6% well into 2025 based on the Fed's projected path," said Marty Green, principal at Polunsky Beitel Green.
The range of forecast rates wouldn't have much impact on the 74% of mainstream mortgages with rates below 5%. But some of the scenarios could expose what Fitch has calculated are nearly $2 trillion in home loans with rates above 6% to refinancing incentives.
For the commercial market, the Fed's cuts could provide a "favorable environment for real estate financing rates for borrowers" but "lenders, likely monitoring inflation quite closely given its impact on Fed interest rate decisions and thus the risk-free rate on which they build in a risk premium for CRE financing, will be cautious that financing is provided at rates in line with policy expectations," said Ermengarde Jabir, senior economist at Moody's Analytics.
Higher for longer mortgage rates have some benefits for depository lenders, according to Chris Stanley, senior director and banking industry practice lead at Moody's Investors Service.
"Banks may benefit from a more normalized curve," Stanley said in a recent report, but added Wednesday that depositories will still need to "fortify credit reserves and be candid with borrowers about CRE debt service and property values in a higher-for-longer environment."
The near-term upward pressure on long-term rates and the Federal Open Market Committee's decision to move more gradually stems largely from the latest reports on employment and inflation.
"Ultimately investors must be more convinced that inflation is on a permanently downward trend before we see long-term rates come down," said David Dworkin, president and CEO of the National Housing Conference.
The inflation rate the Fed has been trying to bring down
"Labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the committee's 2% objective but remains somewhat elevated," the FOMC said in a statement on Wednesday.
These will continue to be the largest determinants of how slow or fast the committee moves to cut short-term rates further in the future, according to a Deutsche Bank research report by Brett Ryan, Justin Weidner, Matthew Luzzetti and Amy Yang.
"In the absence of a sharper slowdown in the labor market, regaining stronger confidence that inflation is in fact on the right trajectory is likely to be the most important factor in determining the timing of the next rate cut," the Deutsche Bank researchers said.
One thing the market probably won't have to worry about next year is a rate hike. Powell said during the press conference he wouldn't rule one out, but doesn't currently see it in the cards.
"I don't think that's a likely outcome," he said.
