Fed Lowers Funds Rate

Mike Sorohan msorohan@mba.org

August 01, 2019

The Federal Open Market Committee yesterday lowered the federal funds rate for the first time since the Great Recession, citing a desire to protect the U.S. economy amid weakening global conditions.

Following its policy meeting yesterday, the FOMC lowered the federal funds rate by 25 basis points to 2.00-2.25 percent. "This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain," the FOMC said in its statement.

The decision was not unanimous; despite persistent pressure from President Donald Trump, who pushed the Fed for a 50 basis point reduction, two voting members, Esther L. George and Eric S. Rosengren, voted to keep the federal funds rate at 2.25-2.50 percent.

The FOMC also voted to reduce its balance sheet of mortgage-backed securities purchases beginning in August, rather than in the fall.

Mortgage Bankers Association Chief Economist Mike Fratantoni said the rate hike came as no surprise.
"The rate cut was clearly telegraphed in advance, and was fully priced into mortgage rates," Fratantoni said. "However, the Fed continues to try to interpret conflicting signals from the economic data. Globally, growth continues to weaken, as trade tensions persist. On the other hand, in the U.S., job market and consumer spending data remain strong, and inflation ticked up a bit in June."

Fratantoni said given these mixed signals, it was not surprising that there were dissenting votes in favor of keeping rates on hold at this meeting. "The statement signaled that the Fed will continue to be data dependent, and that this cut does not lock them into a path of future rate cuts, but we expect they will cut rates once more this year and once in 2020," he said. "By that point, this period of weakness in global growth should have passed."

The MBA forecast calls for mortgage rates to hold steady around 4 percent over the next few years. "This should provide ongoing support for homebuyers by increasing affordability, particularly in light of the slower pace of home-price growth we have seen so far this year," Fratantoni said.

Matthew Speakman, economist with Zillow, Seattle, agreed that the market had anticipated a rate cut for several weeks. "The more pressing question had been whether the reduction would be a quarter percentage point or half," he said. "Chairman [Jerome] Powell has been transparent about the reasons behind today's stimulus, including slowing economic growth globally, trade-related uncertainty and stubbornly low inflation. Because this move was widely expected, the immediate impact on bond markets, and thus, on mortgage rates, was far less pronounced than is typical."

Looking ahead, Speakman said, markets will now have to anticipate whether another cut is coming or if the Fed is done adjusting policy for now. "The Fed historically does not stop at just one cut, and we will likely see another this year if Chairman Powell insists that slowing price growth is a central cause for this rate cut," he said. "However, if the Fed signals that this is the only policy adjustment they have planned, bond yields may even be due for an increase."

The full FOMC statement appears below:
"Information received since the Federal Open Market Committee met in June indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

"In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

"The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.

"Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent."

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