Fed Cuts Rates by 50 Basis Points in September

September’s Fed cut

The Federal Reserve made its first rate cut in four years at its September meeting, lowering the federal funds target range by 50 basis points.

The central bank began its crusade to bring down inflation in March 2022 with its monetary tightening policy. After a lot of patience, the voting committee deemed the decelerated pace of inflation — most recently falling to 2.5% in August — was sustainable and they decided the time had come to cut rates.

“The FOMC lowered rates by 50 basis points at its September meeting and signaled that this is the first cut in a series that should bring rates down by about 2 percentage points by the end of 2025,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association. “Market participants had been divided about how much the Fed would cut at its meeting today, so this decision is likely to spur some rate volatility as investors adjust to this expected path for monetary policy.”

The Fed’s role and September’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 September meeting, the Federal Open Market Committee (FOMC) cut the federal funds target range by 50 basis points after holding it steady eight consecutive times. The U.S. annualized inflation rate decreased for the sixth-straight month, falling to 2.5% in August from 3.5% in March, according to the U.S. Bureau of Labor Statistics. Notably though, it remains above the FOMC’s goal of 2%.

In its post-meeting statement, the Committee said it “has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance.”

The annualized inflation rate hit a 41-year high of 9.1% in June 2022 but mostly followed a downward trajectory since. After the FOMC’s previous meeting in July, industry experts and economists forecasted a rate cut in September with potential for more down the road.

In addition to cutting the fed funds rate by 50 basis points, 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 Nov. 6-7, 2024.

How will mortgage rates react?

After climbing to a 23-year high in 2023, mortgage interest rates gradually declined as 2024 unfolded. September’s highly anticipated Fed cut (with more predicted to come) helped drive them down in recent weeks.

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

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

Inflation has progressed toward the FOMC’s 2% goal, but needed 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.

Should you lock in a mortgage rate?

Because multiple economic and geopolitical factors influence mortgage rates, volatility is a defining trait.

Although projections can shift, the FOMC’s latest action signaled the economy has cooled enough that a rate cut was seen as appropriate. As long as the pace of inflation continues slowing in a sustainable way, additional cuts could be in our future. Regardless of where rates go, you should always negotiate and get creative in budgeting. Building home equity is one of the biggest advantages of owning property and most common ways to accumulate wealth.

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.