As Presidential Race Takes Turn, Feds Putting Together The Pieces For Rate Cuts

By PATRICK LAVERY

The July 21 decision by President Joe Biden to stand down from a re-election bid, clearing a runway for Vice President Kamala Harris to face former President Donald Trump in November, reinvigorated the 2024 presidential race and brought renewed emphasis to one debate in particular: whether it was Trump, in the final year of his term, or the Biden-Harris administration since then, that has been more to blame for lingering inflation that remains one of the United States’ most enduring financial effects from the Covid pandemic.

That inflation, the Federal Reserve has maintained, has been the primary reason first for a steady series of hikes in the Fed’s key interest rate and then, for a full year now, the freezing of the target range for that federal funds rate at 5.25% to 5.5%.

It is a freeze that most experts believe will continue for one more meeting cycle of the Federal Open Market Commission, which convenes Tuesday and Wednesday of this week, with Fed Chairman Jerome Powell to issue comments on the FOMC’s latest policy ruling Wednesday afternoon.

Following the last meeting, on June 12, Powell credited the Fed’s monetary policies up to now for a meaningful decline in inflation, but said the number was still not hitting the mark he and his colleagues have long anticipated as a bellwether for a rate decrease.

“Inflation has eased substantially from a peak of 7% to 2.7% but is still too high,” Powell said in prepared remarks to the media. “We are strongly committed to returning inflation to our 2% goal in support of a strong economy that benefits everyone.”

There is another factor that has been creeping up in conversations about rates, however, and it’s not necessarily unexpected: CNET Money reported in early July that Powell is aware of a nationwide unemployment rate that has now breached 4% and that pinning a rate cut’s hopes on inflation only may be foolhardy.

“Elevated inflation is not the only risk we face,” Powell was quoted as telling Congress at the time. “You don’t want to wait until inflation gets all the way down to 2% because inflation has a certain momentum… if you waited that long, you’ve probably waited too long.”

How did we get here, exactly? It’s a well-known story, but deserves a refresher.

A little less than two years after the onset of COVID, at the beginning of 2022 and the start of Biden’s second year in office – and in the wake of blockages in the supply chain that had driven the prices of everything from baby formula to houses skyward during 2020 and 2021 – the FOMC over the course of a series of meetings raised the key rate from near zero to an eventual two-decade high of 5.25% to 5.5% by mid-2023.

There it has stayed from one summer to the next, despite optimism at the beginning of 2024 that the target range would be bumped down three times within the calendar year.

If a decrease is ultimately decided upon this week or in September, that goal is still mathematically achievable. The FOMC will have summits on November 6 and 7 and December 17 and 18. Whether this is likely is another question entirely.

In the meantime, patience, if not already worn thin, is starting to become threadbare.

Earlier this month, the Wall Street Journal surveyed economists, and nearly a quarter of them (24.6%) said the time for a rate cut is now, even if they believed it wouldn’t actually happen. Investopedia, which called an eventual cut a “turning point” for the economy, reported last week that Goldman Sachs chief economist Jan Hatzius wrote a commentary on the matter putting forth the question bluntly and rhetorically.

“If the case for a cut is clear, why wait another seven weeks before delivering it?” Hatzius asked.

No change in the Fed’s key rate now almost certainly means no downward movement in mortgage rates.

According to Forbes, a 30-year fixed-rate mortgage is currently pulling an average of 7.33% interest, up a bit from 7.26% a week ago. The rate for a 15-year fixed-rate mortgage has held steady, at 6.51%.

While one does not dictate the other, what action the Fed takes and in what direction mortgage rates move are, of course, intertwined, and so potential homebuyers should not expect a significant step downward until the fall.

The best move may be to wait, as the key Fed rate and mortgage rates both lowering will ultimately be beneficial to the consumer, First American Financial Corporation deputy chief economist Odeta Kushi told CNET Money.

“Sitting on the sidelines may allow a potential buyer to continue to pay down their debt, build up their credit, and save for the down payment and closing costs,” Kushi said.

So, what can market watchers look for this Wednesday?

Typically, Powell’s press conferences are peppered with some veiled hints and indications of what course the FOMC is likely to take at its next meeting. The word “groundwork” has been seen a lot in press coverage of this week’s convening, and it seems to be the groundwork for a change of direction in policy that may finally bring a measure of relief to consumers.

But if the last few weeks in politics have taught Americans anything, it is that the game is always changing, and flexibility – in finances, ideology, or any number of other areas – is one of our most valuable commodities.

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