Will Mortgage Rates Go Down After the September Fed Meeting?

Will mortgage rates rise after the Fed meets?

The Federal Reserve will hold its next Open Market Committee meeting on September 17-18. Will it finally come with a rate cut? Or will the committee continue holding rates steady as it did for the past eight meetings?

While it remains above the Fed’s long-term goal of 2%, the annualized inflation rate dropped for the fifth straight month, going from 2.9% in July to 2.5% in August.

At its July meeting, the central bank telegraphed a rate cut coming in September, with the potential for more, as long as the decelerating inflation appears sustainable. For September’s meeting, the question for many is not whether a cut is coming, but how big will it be.

Will the Fed cut rates in 2024?

With the economy slowing and inflation descending, the FOMC signaled in July that a rate cut should finally come in September. The central bank has been waiting for sustainably softer market data before making a cut.

As the Fed’s job includes stabilizing the U.S. financial system and setting monetary policy, it’s responsible for maintaining a long-term inflation rate of 2%. Keeping inflation near that level keeps prices steady for consumers.

The annualized rate started surging in 2021 and spiked to a 41-year high of 9.1% in June 2022, according to the U.S. Bureau of Labor Statistics. That year, the Federal Open Market Committee (FOMC) took action by hiking the federal funds rate to tame inflation.

The Fed adjusted its monetary tightening policy multiple times since then. Most recently, the central bank held the fed funds rate target steady in May, June, and July. The latest inflation reading crept down to 2.5% in August 2024.

Although forecasts heading into 2024 optimistically projected rate cuts as early as March, inflation didn’t cool enough for the FOMC to reduce the federal funds rate. The committee could always surprise us, but many experts anticipate a 25 basis point cut at its September meeting with growing optimism for 50 basis points.

A July Bank of America survey showed a 62% share of investors predicted the first of three rate cuts by July 2024 to begin in September.

Interest rate growth could continue

Interest rates trended up through 2023, with the average 30-year fixed mortgage climbing to a yearly high of 7.79%, according to Freddie Mac. They came back down in 2024, with the 30-year FRM reaching 6.35% on September 5.

Although the annualized pace of inflation fell from the last two years, it’s still above the Fed’s goal. Because of this, tightening monetary policies could always return until inflation gets brought down to a normalized level. Interest rates are notoriously difficult to predict but typically rise in response to Fed tightening.

Due to the rapid rate growth we saw in 2023, some lenders will allow you to lock in a rate for 90 days at little or no cost so you’re protected from higher rates if you don’t close quickly. A few examples of lenders offering this include AmeriSave Mortgage, Quicken Loans, and Rocket Mortgage.

Some lenders are even offering borrowers refinances without repeat lending fees or appraisal fees when rates eventually hit a down cycle. When mortgage shopping, be sure to ask your loan officer about these services.

Mortgage rates and the Fed’s role

The Federal Reserve doesn’t determine mortgage rates. Instead, rates are intrinsically tied to the Fed’s actions. At the end of last year, the Fed announced plans to cut its federal funds rate multiple times in 2024.

The fed funds rate is the amount banks pay to borrow money from each other overnight and an increase signals higher inflation and economic expansion. Mortgage interest rates typically rise in response to growth in the fed funds rate.

“Home buyers will come out on top this fall if the Fed cuts interest rates. While the Fed might not set mortgage interest rates, changes in short-term borrowing costs almost always have a ripple effect in real estate,” said Nick Boniakowski, head of agent partnerships at Opendoor. “Mortgage rates have been trending downward, though they’re still quite high — inspiring sellers to stay put, keeping more manageable mortgages, and deterring buyers from moving. A Fed rate cut could shake loose the stagnancy in the current market.”

How mortgage rates respond in the immediate aftermath of these FOMC meetings has been a mixed bag over the last year. After the three most recent rate pauses, they grew five (0.05%) basis points in May, while decreasing four (0.04%) and five (0.05%) points in June and July, respectively.

Advice for borrowers

All signs point to the FOMC voting to cut the fed funds rate range in September, likely by 25 basis points.

Even if you missed out on the rock-bottom rates from the last couple years, they’re still below average historically and you can always refinance once they hit a down cycle. It’s also important to note that many people build wealth through home equity.

“Because mortgage rates tend to fluctuate, I always advise buyers to focus on their specific budget and needs rather than trying to predict economic factors,” Boniakowski said.

If you’re ready to apply for a mortgage and become a homeowner, speak with a local lender to see what kind of loan and interest rate you can qualify for ahead of July’s Fed meeting.