No rate cuts yet, but they're 'on the table'
As expected, the Fed held steady on rates today, but signaled the possibility of cuts in September. That might not mean big drops in mortgage rates, however.
Following its meeting today, the Federal Reserve kept interest rates at current levels, in line with expectations — but signaled it was open to cutting rates in September.
Inflation still too high: The committee voted to keep the federal funds rate at around 5.5%, noting in a news release that it will not cut rates until it has greater confidence that inflation is continuing to move closer to the 2% target rate. The board acknowledged, however, that progress has been made in recent months.
While not directly tied to borrowing costs, the Fed's actions influence the direction of mortgage rates. The 30-year fixed rate has hovered around 6.78% in recent weeks, according to the Freddie Mac survey.
In remarks following the decision, Federal Reserve Chairman Jerome Powell said that second-quarter inflation readings "have added to our confidence, and more good data would further strengthen that confidence."
"We remain committed to bringing inflation back down to our 2% goal," Powell reiterated.
What happens in September? Powell said the board has not yet made any decisions about future meetings. But if inflation moves lower, a September rate cut "could be on the table."
Most analysts are expecting cuts to begin this fall, but buyers shouldn't get too excited, said Bright MLS Chief Economist Lisa Sturtevant.
"Prospective homebuyers expecting a big drop in mortgage rates after the Fed's September meeting are going to be disappointed. The mortgage market may have already largely built in the impending rate cut, as we've seen mortgage rates come down over the past few weeks.
Where does the labor market fit in? Inflation won't be the only factor guiding the Fed — other economic data, like the state of the labor market, will also determine when rate cuts would start.
Powell noted that the board doesn't think the labor market is currently contributing to inflation, but they are watching it closely, and they also don't want to see inflation creating further pain in the jobs market.
"I would not like to see a further material cooling in the labor market," Powell said.
All eyes on economic indicators: Today's decision confirms that the Federal Reserve is waiting for a little more positive data in an uncertain economy.
"This means that the inflation and unemployment data over the next few months will continue to be consequential for interest rates, including mortgage rates," said Danielle Hale, chief economist for Realtor.com.
"For home shoppers and sellers, I continue to expect that peak mortgage rates are in the rear-view, but volatility remains a risk, complicating moving decisions for home sellers, homebuyers, and renters alike," Hale said.
Lock-in effect remains strong: While declining mortgage rates could give the real estate market a boost, it would take a significant drop to "unlock" a majority of homeowners, said Odeta Kushi, deputy chief economist at First American.
"We expect a very modest easing in the affordability constraints holding back potential first-time buyers, as well as a little easing in the magnitude of the rate lock-in effect for existing homeowners," Kushi said, adding that 86% of existing homeowners with a mortgage have a rate below 6%.