Where are Interest Rates Headed?
Among its other responsibilities, the Federal Reserve (the central bank of the United States – also known as the Fed) is responsible for managing the country’s money supply, regulating banks, protecting credit rights of consumers, providing financial services to the U.S. government, and setting short-term interest rates.
When the Fed thinks that the economy is slowing, it is more likely to cut interest rates. This will make it more affordable for companies to borrow for the purposes of expansion or factory improvements, and for start-ups to open new businesses.
After four rate increases during 2018, due to a healthy and growing economy, investors now widely believe that the Fed is on the cusp of cutting rates. This is because the general view of the vast majority of independent economists and those on the Fed board believe that the economy is slowing due to the trade war with China, slow economic growth in Europe, a drop in domestic manufacturing, and a pullback in U.S. business investment.
Those in the real estate business, prospective homebuyers, and sellers also pay particular attention to the direction of interest rates.
Simply put, when rates are cut, more potential buyers enter the market because the purchase of a property becomes more affordable due to those lower rates – and therefore lower monthly mortgage or refinance payments. Also, when there are more buyers in the market, the competition often results in higher prices for sellers. So, those lower interest/mortgage rates have the beneficial effect of potentially helping both buyers and sellers.
The belief that rate cuts are coming is also the main reason the stock market is soaring - currently at or near or at record levels. And when potential buyers see increased wealth in their monthly financial statements, it gives them added confidence to purchase a property.
While the Fed did not lower rates at their monthly meeting on June 19th, Fed Chairman Jerome Powell strongly indicated that a cut may very well come during their next monthly meeting in July. As quoted on June 18th in the Wall Street Journal, Powell said: “The case for a somewhat more accommodative policy has strengthened.”
For the Fed not to cut rates at its July meeting, “It would take all the data coming in to be consistently strong,” said Seth Carpenter, chief U.S. economist at UBS.
Notably, the Fed dropped its language from its policy statement, describing its stance as “patient,” – which implied rates were on hold. Instead it said uncertainties about the economic outlook have increased, a phrase it has used during past periods of rate cuts.
But even though the Fed did not cut its short-term rates in June, mortgage rates have nevertheless been falling recently, and are now below 4% for the first time since November of 2017. Therefore, it is not surprising that existing-home sales have rose 2.5% in May from the preceding month. As another Wall Street Journal article reported on June22, “Sales of previously owned homes rose in May, a sign that falling mortgage rates could be nudging the housing market …”
If the Fed cuts short-term rates at its next meeting in July, it will influences all rates – those on credit cards, home equity lines of credit, and mortgages – and this will serve to drive down mortgage rates even further.