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The Fed's anti-inflation campaign pushed Fed Funds rate from just above 0% to over 5% where it has stayed since summer 2023. While high rates ultimately tamed inflation, they also made borrowing much more expensive from car loans to mortgages.  However, with cooling inflation data, Fed watchers now see at least 2 rate cuts before the end of 2024 on their next meeting penciled in for November 6 - 7 and the last on December 17-18. Should investors recalibrate their expectations for fewer cuts in 2024 than anticipated, we may see Treasury Yields and consequently mortgage rates, rise in the short term and further gradual declines in mortgage rates in the medium term. Some economists say the benchmark Fed Funds rate could be as low as 3% to 3.5% by the second half of 2025. Depending on who wins the presidential, rates could fluctuate either way. Trump's policies are viewed by economists as more inflationary than Harris. Her policies are seen as less inflationary which could ease mortgage rates if inflation continues to decline. Higher inflation could keep mortgage rates elevated no matter who wins the election. 

On Wednesday (9/18/24), as many had expected, the Federal Reserve board took an aggressive approach with its 50-basis point the biggest single slice to borrowing costs since 2008 and the first rate cut in more than four years. The central bank lowered the target benchmark range to between 4.75% and 5%, ending the most aggressive tightening of U.S. monetary policy in 40 years.  The Fed Chairman Jerome Powell said in a press conference following the rate announcement that “this decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%. The economy is in good shape, and we want to keep it there.”  Mortgage rates which have fallen in recent weeks may have already priced in the rate cut so buyers shouldn’t expect more big declines right away. 

How much more are mortgage rates expected to drop?  Mortgage rates rise and fall due to shifts in expectations including how the bond market reacts to the Federal Reserve's interest rate policy decisions. Mortgage rates aren't directly impacted by changed to the federal funds rate, but they often trend up or down ahead of Fed policy moves and any improvements in mortgage rates have already been baked into current rates in anticipation of the future rate cuts. This is because mortgage rates change based on investor demand for Mortgage-Backed securities (MBS) and this demand is often impacted by how investors expect Fed policy to affect the broader economy. Michael De Pass, an analyst from Citadel Securities has suggested that the Federal Reserve will only implement one more additional 25 basis point interest rate cut for the remainder of 2024 - citing the economy's underlying strength in September 2024 labor market data and the "stickiness" of inflation as primary reasons for the more cautious outlook. 

Another reason that the reaction to the news of the larger rate cut was muted was that the long-term of officials for the federal funds rate close to the levels anticipated by investors. Therefore, when the Fed finally announces its rate cuts, the change in the mortgage rates could be less dramatic. If inflation keeps cooling without the economy falling into a recession, then mortgage rates may not fall much below 6%. 

When should I refinance? Rate fluctuations during 2024 had given us little uncertainty about when things might stabilize. You can start your refinancing process without locking your rate. You may monitor for any rate fluctuations up until about 7 days prior to closing when you must lock-in your rate. One rule of thumb to consider when refinancing is whether you can reduce your current rate by at least half to three-quarters of a percentage point. Once that happens, you can compare the monthly amount you are savings against the closing costs you will have to pay to refinance. If you can recover your closing costs in between 3 to 5 year period (the quicker the better), then you should consider refinancing. The longer you intend to stay put, the better the chance of refinancing to a lower rate and to maximize Return On your Investment (ROI).  Here are more reasons on why you should refinance.

Mortgage rates fluctuate daily and corresponds with major economic events such as inflation report and geopolitics.  I recommend that you work with a local independent mortgage broker such as myself with access to multiple wholesale lenders and someone that you can get a hold of even on weekends with questions.  Check your current market rates here and let's chat. I am always available to answer your questions.