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Mortgage rates are primed to retreat further from 2023 highs after Federal Reserve policymakers indicated at their final meeting of the year that they anticipate cutting short-term rates three times by the end of next year.
Bond market investors who fund most mortgages are anticipating that the Fed will begin cutting rates as soon March, and futures markets are pricing the odds of two or more rate cuts by May 1 at better than even.
Yields on 10-year Treasury notes — which are a reliable indicator of where mortgage rates are headed next — were down more than 17 basis points after Wednesday’s Fed meeting, as investors gained additional confidence in spring rate cuts.
While the central bank left rates unchanged in a unanimous vote Wednesday, as expected, Fed policymakers indicated in their summary of economic projections that they anticipate cutting the federal funds rate to 4.6 percent by the end of next year, to 3.6 percent by the end of 2025, and to 2.9 percent by the end of 2026.
Having hiked rates 11 times between March 2022 and July 2023, the central bank’s target for the federal funds rate is currently between 5.25 percent and 5.50 percent, the highest level since 2001.
While Federal Reserve Chair Jerome Powell had warned as recently as Dec. 1 that the Fed might have to raise rates again, policymakers have been in a wait-and-see mode since July, as they assess the impact of previous rate hikes on economic growth.
Inflation trending down
With Tuesday’s report that annual inflation cooled for the third straight month in November, to 3.1 percent, Fed policymakers seem to be convinced that they’ve hiked enough.
But at a press conference following Wednesday’s meeting of the Federal Open Market Committee, Powell said future decisions will be data-driven, and once again warned that the Fed is prepared to raise rates again if inflation doesn’t keep heading in the right direction.
“While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured,” Powell told reporters.
The Federal Open Market Committee’s summary of economic projections, which showed the median projection is for three rate cuts next year, is “not a committee decision or plan,” Powell warned. “If the economy does not evolve as projected, the path of policy will adjust as appropriate to foster maximum employment and price stability goals.”
But the CME FedWatch Tool, which tracks futures markets to predict the odds of the Fed’s next moves, showed investors on Wednesday were pricing in a 76 percent chance of one or more Fed rate cuts by March 20, up from 41 percent on Tuesday and 10 percent on Nov. 13.
Futures markets’ May 1 rate predictions
Source: CME FedWatch Tool.
Futures markets predict a 96 percent chance of at least one rate cut by May 1, and better than even odds (66 percent) that Fed policymakers will cut rates more than once by then. The CME FedWatch Tool puts the odds of three 25-basis point rate cuts by May 1 at 9.9 percent.
Ian Shepherdson
Pantheon Macroeconomics Chief Economist Ian Shepherdson agrees that the Fed will be more aggressive than its summary of economic projections indicates, and could implement six rate cuts totaling 1.5 percentage points next year and four more cuts totaling 1 percentage point in 2025.
“Ultimately, policymakers will do what the data tell them to do, and we think inflation will fall faster than they expect,” Shepherdson said in a note to clients.
Mortgage rates staying under 7%
In the near term, rates on 30-year fixed-rate loans — which, according to Optimal Blue data, slid below 7 percent on Dec. 5, and on Tuesday had already dropped 85 basis points from a 2023 peak of 7.83 percent — are likely to follow 10-year Treasury yields lower.
A daily rate lock survey conducted by Mortgage Daily News showed rates on 30-year fixed-rate loans plunged another 27 basis points Wednesday, to 6.82 percent.
Mike Fratantoni
“Additional rate hikes no longer appear to be part of the conversation,” Mortgage Bankers Association Chief Economist Mike Fratantoni said, in a statement. “It is all about the pace of cuts from here.”
“We expect that this path for monetary policy should support further declines in mortgage rates, just in time for the spring housing market,” Fratantoni said. “We are forecasting modest growth in new and existing home sales in 2024, supporting growth in purchase originations, following an extraordinarily slow 2023.”
Mortgage lending expected to pick up next year
Source: Fannie Mae and MBA forecasts, November 2023.
In a Nov. 17 forecast, MBA economists said they see purchase loan originations growing by 15 percent in 2024, to $1.53 trillion, and refinancing originations growing by 56 percent, to $490 billion.
Fannie Mae forecasters on Nov. 13 predicted more modest growth in purchase loans (10 percent in 2024), but expect refinancing originations to grow by 70 percent next year, to $428 billion.
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