Rate Hike Pause Continues
At the conclusion of the November 1, 2023, Federal Reserve meeting, the Fed continued the pause in interest rate hikes to the Fed Funds rate. This was a follow-through on the pause from the September 20, 2023 meeting and it allowed mortgage rates to begin lowering off the 23-year high we hit in the middle of October of this year. Continuing improvements to the inflation readings are finally showing that the historic Fed Rate hikes from March 2022 through July 2023 are having the desired effect. Despite some tough talk from some of the Fed members regarding continued rate hikes this year and into 2024, the markets are predicting another pause at the December 12-13, 2023 meeting.
2% Target for Inflation
Eventually, once the Fed feels inflation is close enough to its 2% target, the Fed will start cutting the Fed Funds interest rate. This could start happening sooner than we were expecting just a few months ago. In addition to decreasing inflation that may cause the Fed to start cutting the Fed Funds rate, we are starting to see a slowing economy, reduced hiring, and increased initial jobless claims.
Indications for 2024 Rates
Former Fed Vice Chair, Roger Ferguson, thinks the Fed is done hiking and that the Fed will start cutting the Fed Funds rate in the second half of 2024. On average, the first cut comes 10 months after the last hike, which occurred in July, 2023. History tells us that the first cut will come around May of 2024.
The markets are currently predicting no rate hikes on December 13th. After that, the markets are looking for rate cuts in 2024: a 4% chance of a rate cut on January 31st, a 35% chance of a rate cut on March 20, a 69% chance of a rate cut on May 1, an 89% chance of a rate cut on June 12, a 96% chance of a rate cut on July 31, a 99% chance of a rate cut on September 18. Now the markets are looking for a minimum 1% drop in the Fed Funds in 2024.
Effects of Quantitative Tightening
It’s also important to note that the Fed has been conducting Quantitative Tightening, QT, since June 2022. This is where they allow assets, such as Mortgage Backed Securities, MBS, and Treasury Bonds (Treasuries), to sell off their balance sheet, as opposed to reinvesting proceeds (interest earned) from those assets back into MBS and Treasuries.
Since the Fed started QT in June 2022, they have reduced their balance sheet by over 1.5 Trillion, or roughly $1 Trillion per year. One of the main reasons bond yields and mortgage rates have been moving higher is the massive issuance of Treasuries because of the debt the US continues to pile on. The issuance is flooding the market with supply that must be absorbed. When there is more treasury bond supply than there is demand in the market, bond yields rise and impact mortgage rates since mortgage rates are based on bond yields.
Once the Fed starts to cut rates, they will likely end QT, as they are not going to have one foot on the gas and one foot on the brake at the same time. That means the Fed will start reinvesting the assets that mature and would fall off their balance sheet, and they would be a buyer again, absorbing a ton of the supply coming to market from the Treasury. This would be a big benefit to the bond market and mortgage rates because it would increase the demand for treasuries.
Rates Have Peaked
The main point to take from the current data and Fed actions is that it appears we have peaked out on mortgage interest rates and we should see a drop in mortgage rates into the 6% APR range by the end of 2024 and possibly into the 5% APR range sometime in 2025. The drop in mortgage rates will naturally cause a mini refinance run and an increase in home prices with more buyers coming back into the market. Reach out to me if you want to be prepared for the rate drop for mortgage refinancing or home purchasing,
If you want to plan your next home ownership move in sync with the rates outlook, please feel free to reach out to me or to schedule a call here on my calendar.
As always, your mortgage guy,
Viral (Vic) Joshi
Home of Real Mortgage Advice®