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Federal Reserve Chair Jerome Powell said on Friday that “the time has come for policy to adjust,” signaling a cut in the federal funds rate at the September meeting of the Federal Open Market Committee (FOMC) as expected by monetary policy watchers.
“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,” Powell said during a speech at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming.
That’s good news for the mortgage and real estate industries, which have been challenged for some time by higher rates. Following Powell’s speech, the 10-year U.S. Treasury yield declined, and the expectation is that this will also be reflected in the historically correlated 30-year fixed mortgage rate, which currently stands at 6.67% for conforming loans and 6.73% for jumbo loans, according to HousingWire‘s Mortgage Rates Center.
“The immediate reaction to the speech resulted in some reductions in longer-term Treasuries and secondary mortgage market yields, 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,” Mike Fratantoni, senior vice president and chief economist for the Mortgage Bankers Association (MBA), said in a statement.
Powell said in his speech that his “confidence has grown that inflation is on a sustainable path back” to the Fed’s 2% target. He added that after a pause earlier this year, consumer prices have risen 2.5% over the past 12 months.
Regarding the labor market, Powell said it “has cooled considerably from its formerly overheated state,” with the unemployment rate rising over the past year to its current level of 4.3%.
According to Powell, rising unemployment has not resulted from a greater number of layoffs but from a substantial increase in the supply of workers and a slowdown from the previously frantic pace of hiring.
“Even so, the cooling in labor market conditions is unmistakable,” he said.
After inflation peaked in the summer of 2022, it came down due to the reversal of pandemic-related distortions to supply and demand, which “took much longer than expected,” according to Powell.
Prices also came down due to a restrictive monetary policy. The FOMC raised its policy rate by 425 basis points in 2022 and by 100 basis points in 2023, holding rates at their current range of 5.25% to 5.5% since July 2023.
As of Friday, monetary policy watchers believe there is a 100% chance of a rate cut in September. Most of them — 65.5% precisely — are betting on a 25-basis-point cut, according to the CME Group‘s FedWatch Tool, which measures the likelihood of changes to rates at upcoming meetings.
“Chair Powell just rang the bell to start rate cuts,” Fratantoni said. “The softening of the job market has given the Fed the confidence that inflation will not re-accelerate. There is certainly a risk that the unemployment rate could rise faster and further than the Fed would like, but Chair Powell indicated that they are watching and would react to such a further softening in the job market.”
