Hikes on Hold
The Federal Reserve continued holding on interest rate hikes and finally started showing signs that rate cuts would be coming soon. After the December 12-13 Federal Open Committee Market (FOMC) meeting, the Fed not only paused on increasing the Fed Funds interest rate for the third consecutive meeting but also began talking about future rate cuts.
Fed Signals Rate Cuts
Here is an excerpt from MBS Highway, one of my most trusted sources of information regarding mortgage interest rate trends:
“The Fed pivoted at yesterday’s meeting, completely changing their tone and signaling rate cuts next year. The Fed sounded much more dovish, saying that meaningful progress on inflation has been made and downgrading their view of the economy. Powell outright said that the Fed will not be waiting for inflation to reach their target before cutting and would do so well in advance of it to account for the lags. When asked what inflation would have to be for the Fed to cut, he did not commit, but it seems to us if we see it get under 3% that the Fed would give the green light to cut. The Fed is finally starting to look a bit into the future, which is a good thing. Unlike previous talks, Powell did not try to downplay the market’s expectations of cuts next year.
The Fed’s Dots plot chart, which shows anonymously where the 19 Fed members believe the Fed Funds Rate will be over the next few years, was telling. There were a few outliers, with two members thinking that there would be zero cuts next year, while one member is pricing in 1.5% of cuts. The vast majority believes the Fed will cut by .5% to 1%, with the median Fed Funds rate at 4.6%.
The Fed Futures or the markets’ odds of rate cuts next year moved sharply higher and were pulled forward. The market thinks there is almost a 20% chance of a rate cut at the January 31 meeting, followed by an 84% chance at the March 20 meeting.
The market has a 100% chance of a .25% rate cut priced in by May 1, with an 80% chance of a .5% rate cut. In June the odds are at 81% for a .75% rate cut!
Inflation Dropping
The Fed’s stated target for inflation is 2%. The Fed has been consistent in shooting for this target before making any significant changes to their rate policy. One of the key inflation metrics that the markets follow, the Personal Price Index, PPI, is showing a core reading of 2% for November 2023. The other key indicators of inflation, Personal Consumption Expenditures (PCE) and Consumer Price Index (CPI), are falling closer to the Fed’s 2% target as well. For October 2023, PCE came in at 3% and for November 2023, CPI came in at 3.1%. The Fed uses the PCE as their primary metric and the next reading for November 2023 is predicted to come in between 2.8% and 2.9%. At the time I am writing this newsletter, the December 22nd PCE report has not been released.
All indications are pointing to inflation dropping to 2% in the near future and the Fed will want to start cutting rates before then to prevent the economy from falling into a recession.
Recent Rate Changes
The yield on the 10-year treasury bond fell below 4% on December 14th for the first time since August 1st. Average 30-year fixed mortgage rates went back below 7% APR and are heading back in the 6% APR range, as I had predicted in the December installment of this newsletter. Look for more downward rate pressure in the first quarter of 2024 with increasing refinance and purchase activity in the markets.
Position Yourself for 2024!
After a historically poor 2023 for mortgage rates, I am preparing for a brisk return of business in 2024. With lower rates and more buyer activity, we should get more inventory to come to market starting in 2024 and accelerating in 2025. The window to get deals on real estate is closing soon. If you are interested in reviewing your current mortgage and real estate to see how to best position yourself for the coming changes, please feel free to schedule a free mortgage checkup session with me. If you know anyone interested in becoming a homeowner, please pass my information on to them.
If you want to learn more about the window of opportunity coming in 2024, 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®