Fed Rates Could Move Lower This Spring

Inflation moves closer to the Fed’s target rate, as economy continues to grow at a healthy rate, say experts
Published on Feb 1, 2024

While Fed rate cuts may be on the way this spring, they are not quite here yet. But the overall inflation news is good.

Inflation is getting close to the Fed’s target rate, despite gloomy predictions only a year ago, and the economy is still growing at a healthy pace, while consumers keep spending and the unemployment rate is near a half-century low, said an Associated Press (AP) report Wednesday.  

A year ago, said AP, most economists had envisioned a much darker outlook

“As the Fed raised interest rates at the fastest pace in four decades to fight high inflation, most economists warned of a recession, possibly a painful one, with waves of layoffs and rising unemployment. Even the Fed’s own economists had projected that the economy would sink into a recession in 2023,” said the report.

Bankrate.com noted Wednesday that the Fed’s decision comes as inflation hit 3.4 percent year-over-year in December, after reaching the highest levels in decades at over 9 percent in mid-2022. 

The last time the Fed raised rates was at its July 2023 meeting, Bankrate noted. With only one hike in the past six meetings and the Fed’s statement in December that it expects to lower rates this year, consumers should expect rates to decline.

“The ‘soft-landing’ economic scenario – where inflation comes down without sacrificing the economic expansion – is increasingly coming into view and recent economic data validates that,” says Greg McBride, CFA, Bankrate chief financial analyst. “We’re getting closer to the point where the Fed will be comfortable trimming interest rates. It won’t be March, but could be soon thereafter if data continue to trend in the right direction.”

An update this week from the California Association of Realtors (CAR) also pointed out that the economic data from last week shows that the U.S. has consistently out-performed outlooks that called for slower growth in 2023. 

According to the CAR update, the average 30-year fixed-rate mortgage remains below 7% where it has been since early December, even though a stronger economy has, thus far, meant upward pressure on mortgage rates. 

This has helped the housing market, which has seen pending sales rise for the first time since rates hit bottom in early 2021, said the report. 

“As the rebound in housing demand has yet to be accompanied by an equal (or greater) supply response, the market in California is quickly becoming competitive once again as fewer sellers are reducing price and the median price continues its upward trend that began last summer,” said CAR.

Though a recent GDP report last week  had the economy expanding at a 3.3% rate to close out 2023, mortgage rates still remained below 7%–continuing the rally that began in December following the Federal Reserve’s latest meeting, said the CAR report. 

“Inflation continues to trend down and that has bolstered hopes that the Fed is through raising interest rates and will begin to make cuts to the Fed Funds Rate later this year,” the report pointed out. 

According to CAR, such a scenario should help bolster home sales during the spring and summer months as declining rates help to slowly alleviate the “lock-in” effect that results from historically low rate on existing mortgages. 

Although many homeowners are below 3%, said the CAR report, the ones with 5% rates or higher will begin to see the financial disincentive for moving dissipate as rates slowly move downward.

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