Mortgage Rates To Stay Where They Are As Fed Continues Pause

As February unfolds, the Federal Reserve is maintaining its current stance, opting not to make significant changes to its monetary policy. This decision by the Fed means that mortgage rates are expected to remain relatively stable, with no major shifts anticipated in the near term. Borrowers and investors alike are closely watching for any signs of movement, but for now, the landscape of mortgage rates remains unchanged.

The anticipation for lower mortgage rates is high, yet it seems we may need to brace for a bit more patience. It’s likely that February won’t bring significant changes to mortgage rates.

Experts in the market are predicting a drop in mortgage rates over the course of the year. However, this is contingent upon the Federal Reserve indicating a shift towards a more relaxed monetary policy. Following the Fed’s meeting on January 30-31, no such indication was given. Therefore, we can expect mortgage rates to stay fairly stable until there’s a clear sign from the Fed of an impending reduction in the federal funds rate.

The Federal Reserve might announce this much-awaited rate cut at its next meeting, which concludes on March 20. Despite this possibility, the Fed has made it clear that it is not rushing to decrease rates. The decision to cut rates might be postponed until the meetings conclude on May 1 or even June 12.

Looking beyond the immediate fluctuations, experts anticipate a decline in mortgage rates throughout the year. Both Fannie Mae and the Mortgage Bankers Association are forecasting that the average rate for a 30-year mortgage will settle around 6% in the fourth quarter, a decrease from the 7.3% observed in the last quarter of 2023.

The rationale behind the expected drop in mortgage rates is tied to the projection that inflation will continue to diminish. As inflation recedes, the Federal Reserve is likely to reduce the federal funds rate, which should, in turn, lead to lower mortgage rates. However, these developments are more probable in the spring rather than in February.

The Federal Reserve aims to keep inflation at a 2% rate. Its preferred inflation gauge, the core PCE price index, showed a 2.9% increase in December, down from 4.9% the previous year, indicating progress towards the Fed’s target but still with room for improvement.

Diane Swonk, KPMG’s chief economist, highlighted the positive direction of inflation data in a January 26 tweet, predicting the Fed’s initial rate cut to occur at its May 1 meeting. Market expectations, as reflected by the CME FedWatch tool, suggest there’s over a 50% chance of a rate cut by March, with a rate reduction by May seen as almost certain.

While the February forecast suggests minimal changes, it doesn’t rule out fluctuations entirely. Mortgage rates, which adjust daily, are expected to experience minor and gradual shifts.

Significant movements in rates, whether up or down, are likely to be triggered by unexpected economic reports. Key indicators to watch include the monthly employment report and the consumer price index. The employment report for January is expected on February 2, with the CPI report following on February 13.

Unexpectedly strong job growth or higher-than-anticipated inflation could push mortgage rates higher. Conversely, weaker job growth or lower-than-expected inflation could lead to a decrease in rates.

In January, the prediction was for stable mortgage rates, a forecast that held true amidst the month’s fluctuations. The average rate for a 30-year mortgage was slightly over 6.5% at the end of December and just under 6.6% by the end of January.2024 looks to be a year of mortgage rate declines, as can be seen by the forecast table below.

In a recent broadcast on Sunday night, Federal Reserve Chair Jerome Powell confirmed the Fed’s plans to reduce interest rates three times within the year, potentially starting as early as May. During his interview for CBS’s “60 Minutes,” Powell highlighted the strength of the U.S. job market and economy, dismissing concerns of an impending recession. He expressed optimism about the economic outlook, stating, “I do think the economy is in a good place,” and anticipated further improvements. This stance was consistent with his earlier comments at a news conference, following the Fed’s decision to maintain the key interest rate at approximately 5.4%, marking a 22-year peak. Powell emphasized the Fed’s aggressive measures against inflation, which included elevating its benchmark rate 11 times since March 2022, significantly increasing the cost of loans for consumers and businesses.

Powell also mentioned that a rate cut in the Fed’s March meeting seemed premature, with most economists forecasting the initial reduction to occur between May and June. He reiterated the consensus among the Fed’s policy-setting committee members on the appropriateness of rate cuts this year, given the steady decline in inflation. Such cuts would ease the financial burden of mortgages, auto loans, and other forms of borrowing. Despite the Fed’s initial underestimation of inflation’s persistence, Powell acknowledged the central bank’s delayed response in adjusting its key rate. However, with inflation now aligning more closely with the Fed’s target, Powell and other Fed officials remain cautiously optimistic about the economic trajectory, underscoring the economy’s resilience and the anticipated continuation of favorable inflation data.