The perceived probability of a Federal Reserve interest rate cut next month has jumped dramatically after top officials closely allied with Fed Chair Jerome Powell expressed support for further rate cuts.
New York Fed President John Williams, a permanent voter and key voice on the rate-setting Federal Open Market Committee (FOMC), said on Nov. 21 that he sees room for interest rates to fall “in the near term.”
As well, San Francisco Fed President Mary Daly told the Wall Street Journal on Monday that she supports lowering interest rates at the next meeting. While Daly is not a voting member of the FOMC, she has rarely opposed Powell publicly, suggesting the Fed chair could seek a consensus in favor of cutting rates.
In financial and prediction markets, the probability of a quarter-point rate cut in December immediately surged, rising from a roughly 50-50 toss-up early last week to around 85% on Tuesday.
Still, stark divisions remain on the FOMC, with Boston Fed President Susan Collins and St. Louis Fed President Jeff Schmid both signaling that they will likely oppose a further rate cut this year, citing fears of lingering inflation.
The Fed uses higher interest rates to fight inflation and lower rates to stimulate the labor market, in line with the central bank’s dual mandate of price stability and maximum employment. While the Fed doesn’t set mortgage rates directly, expectations about future Fed policy can influence those rates.
Earlier this fall, average mortgage rates fell to a one-year low of 6.17% in late October, just after the Fed cut its policy rate for the second consecutive meeting, taking it to a range of 3.75% to 4%.
The FOMC will next vote on rate policy on Dec. 10, with growing divisions of opinion among the panel’s members making the outcome unclear.
Williams, speaking at a conference at the Central Bank of Chile on Friday, offered the strongest endorsement yet for a December cut, offering a possible window into Powell’s thinking ahead of the meeting.
“I view monetary policy as being modestly restrictive,” said Williams. “Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral.”
Yields on 10-year Treasury notes, a key indicator for mortgage rates, eased following the comments, briefly dipping below 4% on Tuesday for the first time in nearly a month and signaling lower mortgage rates in the coming days.
“It’s hard to think of something that would reverse the momentum toward a cut we’ve seen this week, but there are still over two weeks until the meeting, which can be an eternity in this uncertain macro environment,” says Realtor.com® senior economist Jake Krimmel. “A few major FOMC voices would have to change their tune or some really troubling inflation/labor data would have to surface.”
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