Curve

Mortgage rates could fall even more if the Fed issues a drastic cut

Tim Lucas
The Mortgage Reports editor

The world is watching the Fed

When the Federal Reserve adjourns its 2-day meeting on July 31, it could usher in a new paradigm for mortgage rates.

But analysts and mortgage shoppers alike could be in for a bigger shock than they bargained for.

According to CME Group’s FedWatch Tool, there is a 1-in-4 chance that the Fed cuts its benchmark rate by 0.50% instead of the 0.25% that the market expects.

What happens to mortgage rates if this surprise move plays out?

Quite honestly, it could be a rate-locking bonanza as rates fall past their current 31-month lows.

Request current mortgage rates now. (Aug 25th, 2019)

The Fed could be pondering a deep cut

The economy is golden right now.

Unemployment is hitting 50-year lows, wages are rising, and inflation is almost non-existent. 

It’s the Goldilocks scenario that few generations experience.

And the Fed wants to keep this brilliant economy on the straight and narrow. Enter the reasoning for a rate cut: it’s a pre-emptive strike against potential recession.

Typically, the Fed increases rates during times of economic prosperity. They do this to keep the economy from getting too hot, which leads to rampant inflation.

But with inflation running at or below the Fed’s goal of 2% per year, there’s little reason not to prop up the economy with low rates.

But the bigger factor is trade wars.

President Trump is haggling with China, which happens to be United States’ biggest trading partner by a decent margin. If trade between the two giants falters, the economy could stall or even fall into a recession.

Not to mention a messy Brexit on the horizon, which could upset the world’s 5th largest economy.

So, a Fed cut isn’t as irresponsible as it might first appear. 

And the most powerful financial body in the world could be pondering a deep cut of 0.50%, reducing the already-low federal funds rate range of 2.25-2.50%.

What happens to mortgage rates with a 0.50% cut?

The Fed doesn’t control mortgage rates but it influences them.

It uses the federal funds rate — the rate at which banks lend each other money — to turn the heat up or down on the economy.

As of this writing, markets expect a 0.25% cut to the federal funds rate. A 0.50% cut would surprise markets and potentially send consumer mortgage rates to bargain-basement levels. 

Rates could easily fall to 3-year lows.

That’s because a larger-than-expected cut would tip off markets that maybe things are worse than the Fed is letting on. Maybe a recession is around the corner. Could this be a bold attempt to rescue the economy before it needs rescuing?

Markets could interpret a large cut as a sign of an oncoming recession, more government stimulus, or both.

And that could be a boon for mortgage shoppers.

Advice for July 31

The Federal Reserve adjourns its meeting on July 31 at 2:00 PM ET. If you’ve been waiting for a rock-bottom rate, contact your lender shortly afterward to see if it’s a good time to lock in. 

You might capture a 3-year low rate — one we may not see again for decades.

Verify your new rate (Aug 25th, 2019)