The Federal Reserve approved a much-anticipated quarter-point interest rate cut last week, following a two-day policy meeting, taking down the benchmark overnight lending rate to a target range of 1.75% to 2%.
That comes nearly two months after the policymaking Federal Open Market Committee made its first cut in 11 years. And while no further cuts are planned, divisions remain among individual policymakers.
What It Means for Mortgages
While mortgage rates and federal funds are not directly linked, recently mortgage rates have edged higher on the heels of stronger than expected economic data, noted Tendayi Kapfidze, the chief economist at LendingTree, an online loan marketplace. The average 30-year fixed rate is now close to 4%, according to Bankrate, although that remains relatively low compared to recent years.
“Cutting your monthly mortgage payment by $150 a month might be the pay raise you didn’t otherwise get,” said Greg McBride, the chief financial analyst at Bankrate.
Many homeowners with adjustable-rate mortgages, which are pegged to a variety of indexes such as LIBOR or the 11th District Cost of Funds, may see their interest rate go down as well, although not immediately as ARMs generally reset just once a year.
The Fed’s second consecutive rate cut will also make it slightly cheaper for consumers to borrow money from a home equity line of credit or pay back their current HELOC loan. Unlike an ARM, HELOCs could adjust within 60 days so borrowers will benefit from smaller monthly payments within a billing cycle or two.
The committee cited “the implications of global developments for the economic outlook as well as muted inflation pressures” as the primary rationale for the cut, as it did for the July rate cut. For its economic assessment, the Fed tweaked language to indicate that household spending is “rising at a strong pace” while “business fixed investment and exports have weakened.”
The indecision comes at an important time for the U.S. economy.
Recession fears had risen during the summer amid heightened U.S.-China trade tensions, weakening data particularly in the manufacturing sector, and a progressively rockier global economy. However, the data has firmed up recently, and Fed Chairman Jerome Powell has held to his position that while the central bank will do what is needed to maintain the recovery, he views these cuts as a “mid-cycle adjustment” and not part of a more aggressive strategy to drive rates lower.
Trump Calls For Lower Rates, or ‘Zero’
President Donald Trump has issued a series of blistering attacks on the Fed, calling members “boneheads” who are risking U.S. competitiveness by keeping rates substantially higher than most of the rest of the developed world.
The dot plot did show a lower general trend in rate expectations for subsequent years. But committee members favor keeping the longer-run expectations for the funds rate intact at 2.5%.
Members actually raised their expectations for growth since the last summary of economic projections in June. The committee now sees GDP rising at a 2.2% pace this year, compared to 2.1% in June, though the longer-run expectations remain at 1.9%.
Inflation projections were unchanged at 1.8% for 2019 and 2.5% over the longer run.
FORBES reported that “Looking ahead: A few more rate cuts could be needed to prop up a slowing U.S. economy as well as reduce pressure on the inverted yield curve. It remains to be seen whether the Fed plans on additional rate cuts beyond this year, as further accommodation could be needed to thwart geopolitical risks including the China trade war, tensions in the Persian Gulf and even Brexit.”