Inman News
Recent Trump appointee Stephen Miran was the lone dissenter in Wednesday’s 11-1 vote, holding out for a bigger, 1/2 percentage point rate cut advocated by the president
- The Federal Reserve approved a 1/4 percentage point rate cut on Wednesday, with policymakers signaling two further reductions this year and one next year.
- 10-year Treasury yields, a key indicator for mortgage rates, briefly dipped below 4% for the first time since October 2024 after the Fed vote.
- Fed Chair Jerome Powell emphasized balancing inflation and employment risks, projecting inflation to peak at 3% this year and unemployment to rise to 4.5%, justifying a move toward a more neutral policy stance.
- The Fed continues quantitative tightening but at a reduced pace. A dramatic uptick in mortgage refinancing by homeowners may allow the Fed to shed more of its mortgage holdings, which could prop up mortgage rates.
Federal Reserve policymakers kicked off what’s expected to be a series of rate cuts Wednesday with a modest 1/4 percentage point interest rate reduction, but made it clear that they’re just getting started.
Bond market investors got the message, with yields on 10-year Treasury notes, a barometer for mortgage rates, briefly dipping below 4 percent Wednesday for the first time since October 2024.
Recent Trump appointee Stephen Miran was the lone dissenter in the 11-1 vote to lower the federal funds rate to a target of 4 to 4‑1/4 percent. Miran — sworn in as a member of the Fed’s board of governors on Tuesday after narrowly winning Senate confirmation — held out for a bigger, 1/2 percentage point rate cut advocated by Trump.
In their summary of economic projections, Fed policymakers indicated they expect to make two more 1/4 percentage rate cuts this year and one additional cut next year.
The median response on the so-called “dot plot” showed policymakers expect the federal funds rate will be at 3.6 percent by the end of this year, 3.4 percent by the end of 2026, and 3.1 percent at the end of 2027 — 1/4 percentage point lower than in June.
At a press conference following the vote, Fed Chair Jerome Powell said policymakers expect inflation to rise to 3 percent this year before retreating to 2.6 percent next year and 2.1 percent in 2027.
But with unemployment expected to edge up to 4.5 percent by the end of the year, it was appropriate to take “another step toward a more neutral policy stance” now, Powell said.
“In the near term, risks to inflation are tilted to the upside and risks to employment to the down side,” Powell said. “A challenging situation. When our goals are intentional like this, our framework calls for us to balance both sides of our dual mandate. With the down side to employment having increased, the balance has shifted.”
While the near unanimous vote suggests that Fed policymakers are seeing eye to eye, the dot plot shows six “hawkish” members see no need for additional rate cuts this year — and two expect just one rate cut, Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said in a note to clients.
“Our view remains that the [Fed] has waited too long to pull off a perfect soft landing and will soon see the unemployment rate overshoot its forecast, peaking at about 4 3/4 percent early next year,” Tombs said. “By contrast, the risks to its latest inflation forecast look evenly balanced. Accordingly, we expect the hawks to be won over by the data, much as they have been at this meeting.”
Forecasters at Pantheon Macroeconomics expect the Fed to cut short-term rates by another 1/2 a percentage point this year and by 3/4 of a percentage point in 2026.
In an implementation note, Fed policymakers said the central bank will also continue efforts to shed up to $40 billion in assets each month, although it’s been falling short of that goal.
The Fed’s ‘quantitative tightening’
To bring interest rates down during the pandemic, the Fed bought trillions in government debt and mortgages in a repeat of “quantitative easing” conducted in the wake of the Great Recession of 2007-2009.
The Fed’s cumulative holdings of Treasurys and mortgage-backed securities (MBS) peaked at $8.5 trillion in May 2022. Since then the central bank has trimmed $2.2 trillion in assets from its books.
When the central bank first reversed course and began “quantitative tightening,” the goal was to trim $95 billion in assets every month — $60 billion in Treasurys and $35 billion in MBS.
The Fed has been trying to hit its targets passively — by not replacing Treasurys and MBS as they mature, rather than selling off its holdings.
Because few homeowners have been willing to refinance at current rates, the Fed has only been able to shed $15 billion in mortgage holdings per month.
When mortgage rates were approaching post-pandemic highs in 2023, housing industry groups asked the Fed to stop trimming its mortgage holdings altogether, on order to take pressure off of rates. While Fed policymakers ignored that request, they dialed back the target for Treasury rolloffs to $25 billion a month in 2024 and to just $5 billion a month this year starting in April.
That means the pace of quantitative tightening has been scaled back from a goal of $95 billion a month in 2022 to about $20 billion a month.
But with mortgage rates having already come down by nearly a full percentage point this year, interest in refinancing has picked up. That means the Fed may get closer to its goal of trimming $35 billion in mortgage holdings from its books every month going forward — a development that could prop up rates.
Requests to refinance jumped 58 percent last week compared to the week before and 70 percent from a year ago, according to the latest numbers from the Mortgage Bankers Association.
Mortgage rates have already been coming down in anticipation of today’s “dovish shift in monetary policy,” MBA Chief Economist Mike Fratantoni said, in a statement.
“If mortgage rates hold at these levels, origination activity will be boosted, both for homeowners who purchased in the last three years and can realize considerable savings at these rates, and for potential homebuyers, who now have one more reason to look for a home, in addition to increasing housing supply in many markets,” Fratantoni said.
With Fed rate cuts on the horizon, rates on 30-year fixed-rate mortgages tracked by Optimal Blue had already dropped to a new 2025 low of 6.17 percent on Tuesday.
Mortgage rates hit new 2025 low
Asked whether Fed policymakers are concerned that high interest rates have exacerbated housing affordability issues, Powell said housing “is at the very center of monetary policy.”
“When the pandemic hit and we cut rates to zero, the housing companies were incredibly grateful and they said the only thing that kept them going was that we cut so aggressively and provided credit and things like that, and they were able to finance because we did that,” Powell said.
Lower mortgage rates increases demand for homes, and lower borrowering rates for builders helps with supply issues, Powell said.
Going forward, “I think most analysts think it would have to be pretty big changes in rates for it to matter a lot for the housing sector,” and that the deeper problem is a nationwide housing shortage. That’s “not a cyclical problem the Fed can address” with adjustments to monetary policy, Powell said.