Fed Holds Steady in July, Rate Cut Looms for September

No Fed hike or cut in July

The Federal Reserve wrapped up its July meeting without making any waves.

The central bank now passed on making a rate hike or cut eight consecutive times. However, with the latest inflation reading falling from 3.3% in May to 3% in June, signs are pointing to a cut on the way, possibly as early as September.

“The FOMC did not change its target for the federal funds rate but did shift its statement to acknowledge that inflation is slowing, unemployment is rising, and that there are now more balanced risks to the economy,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association. “While the Fed still hopes for a slower rate of inflation, there is a greater risk now that keeping monetary policy overly tight for too long could lead to unnecessarily higher unemployment.”

The Fed’s role and July’s FOMC meeting

The Fed doesn’t technically set mortgage interest rates. Multiple factors dictate mortgage rate movements, but they do intrinsically correlate with the central bank’s policy actions.

At its July meeting, the Federal Open Market Committee (FOMC) held the federal funds target range static for the eighth time in a row. The annual inflation rate decreased for the third straight month but has mostly moved sideways since last fall. Notably, it remains above the Committee’s goal of 2%. In its post-meeting statement, the FOMC said it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%,” while assessing the always-evolving economic outlooks and risks.

The U.S. annualized inflation rate hit a 41-year high of 9.1% in June 2022 and most recently reached 3% in June 2024, according to the U.S. Bureau of Labor Statistics. After the FOMC’s previous meeting, many industry experts anticipated a rate cut could come as soon as September.

In addition to maintaining the current fed funds rate, the FOMC will also continue reducing its holdings of Treasury securities, mortgage-backed securities and agency debt. As always, the Committee will adjust its policies as necessary based on economic data, outlooks, and risks. The next FOMC meeting will take place on Sept. 17-18, 2024.

How will mortgage rates react?

After climbing to a 23-year high in 2023, borrowers haven’t seen the anticipated decline in mortgage interest rates thus far in 2024. However, they are expected to fall throughout the year, with anticipated Fed cuts helping to drive them down.

The day following each of the three previous rate pauses, the average 30-year fixed-rate mortgage (FRM) posted a weekly increase of 13 basis points (0.13%) in March and five (0.05%) in May but fell four points (0.04%) in June, according to Freddie Mac.

Interest rates typically rise alongside increases to the fed funds rate and decrease after cuts. In its statement, the FOMC said economic activity keeps expanding “at a solid pace,” while job gains moderated and the unemployment rate inched up.

Inflation has progressed toward the FOMC’s 2% goal, but needs to be seen as sustainable for a cut to be called for. A Fed cut followed by decreasing mortgage rates would surely be a welcome sign for house hunters, many of who have been sidelined due to being priced out of the marketplace.

“The Fed is walking a tightrope regarding the nation’s economy as it seeks to balance the risks of a slowing labor market while ensuring continued disinflation,” said Selma Hepp, chief economist at CoreLogic. “Lower mortgage rates in recent weeks suggest the mortgage markets are also anticipating a rate cut which should boost buyer demand at the end of the year.”

Should you lock in a mortgage rate?

Mortgage rates are volatile by nature, influenced by multiple economic and geopolitical factors.

While outlooks can shift, the FOMC’s latest action signals it needs sustainable improvements to inflation before it makes any rate cuts. Although the average 30-year FRM is still high compared to the bottomed-out rates of the pandemic, you can (and should) negotiate your rate and get creative in budgeting. You also shouldn’t forget that building equity is one of the biggest advantages of buying a house.

If you’re ready to begin your path to homeownership, talk to a local mortgage professional to see what rates and loan types you qualify for.