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The mortgage market has been operating in a high-rate environment for the last several years, largely due to the Federal Reserve’s aggressive monetary policy aimed at combating inflation. After a series of rate hikes, the Fed’s benchmark rate has remained at a 23-year high for the past year, significantly impacting borrowing costs across the board, including mortgage rates. However, recent economic indicators suggest a potential shift in this landscape.
Inflation has been cooling over the last four months and the labor market has exhibited signs of weakening, which has had a positive impact on mortgage rates in recent weeks. In early August, mortgage interest rates hit a 15-month low of 6.47%. Rates dipped even lower this week, with the average 30-year mortgage rate falling to 6.46% from 6.49% the previous week.
While these recent rate drops have been enough to spur more interest from homebuyers, they may just be the start of a more significant trend. According to comments made today (August 23) by Federal Reserve Chairman Jerome Powell at the annual Jackson Hole Economic Symposium, a pivotal moment could be coming for the interest rate environment — and, in turn, for mortgage rates. Below, we’ll break down what you should know.
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What Powell’s Jackson Hole comments mean for mortgage rates
During Friday’s speech, Powell provided clear indicators that the Federal Reserve is preparing to make changes to its benchmark rate during its next meeting, which is scheduled for September 17 to 18.
“The time has come for policy to adjust. 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 in his speech.
The Fed Chair cited progress in the battle against high inflation and some weakening in the labor market as factors influencing this potential shift in policy. Powell also noted that there is “ample room” to respond, should economic conditions worsen.
“With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2 percent inflation while maintaining a strong labor market. The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions,” Powell said.
While Powell’s statements do not directly confirm that rate cuts are coming, they are clear regarding the Fed’s intention to adjust its rate policy. And while Fed rate cuts do not directly impact borrowing rates, they do exert a significant influence on the broader interest rate environment, which in turn affects mortgage rates.
So, should that rate cut happen next month, it would likely impact the trajectory of mortgage rates. But what would the ripple effect on mortgage rates be?
While there is a possibility of a 50 basis point cut, expectations are that the federal funds rate will be reduced to a range of 5.00% to 5.25% in September — a decrease of 25 basis points. This approach aligns with the Fed’s typically gradual policy adjustments.
With the initial rate cut expected to be minimal, the impact on mortgage rates is likely to be modest. If the Fed implements a 25 basis point cut, for example, we might see the average 30-year mortgage rate decrease from its current level of 6.57% to around 6.32%. For 15-year mortgages, a comparable 25 basis point reduction could potentially bring rates down from the current 5.95% to approximately 5.70%.
While these potential mortgage rate decreases may seem small, they could still translate into meaningful savings for borrowers over time. More importantly, the initial cut could set the stage for further reductions in the future, potentially leading to a more significant downward trend in mortgage rates over time.
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Should homebuyers wait to take out a mortgage loan?
If you’re planning to buy a home or refinance soon, this situation presents both opportunities and challenges. On one hand, the prospect of getting a lower mortgage rate could mean that it’s worth waiting a few weeks before making a move. On the other hand, trying to time the market perfectly can be a risky strategy, and there’s no guarantee that mortgage rates will continue to fall, as rates are typically adjusted ahead of these types of decisions.
In general, the best approach is to make a decision based on your financial situation and your long-term goals rather than trying to predict short-term market movements. If you can live with today’s mortgage rates, it could make sense to lock one in now. If you need to secure a slightly lower mortgage rate to make homebuying more affordable, being patient could pay off.
The bottom line
While there’s no guarantee that the Fed will cut rates in September, it’s clear based on Powell’s statements that there’s a high likelihood of that happening. And while the immediate impact on mortgage rates may be modest, the potential for further rate cuts in the coming months could lead to more substantial changes in the mortgage market.