The Fed’s Easing Cycle Finally Begins

After its first post-COVID rate hike enacted more than two years ago, the Federal Reserve’s Federal Open Market Committee (FOMC) announced a significant reduction for the short-term federal funds rate at its September meeting. Tight monetary policy was undertaken to fight the worst bout of inflation in four decades. Today’s policy action marks the beginning of a series of rate decreases necessary to normalize interest rates, and to rebalance monetary policy risks between inflation and concerns regarding the labor market.

The FOMC reduced its top target rate by 50 basis points from 5.5% (where it has been for more than a year) to a “still restrictive” 5%. This was a larger cut than NAHB’s forecast projected. In its statement explaining the change of policy, the FOMC noted:

“Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.”

With the above-noted progress for inflation, today’s action is the beginning of a series of federal funds rate cuts, which ultimately should decrease the top target rate to approximately 3% in the coming quarters, as the rate of inflation moves closer to the target rate of 2%.

The pace of these future expected cuts is somewhat open to debate. Fed Chair Jerome Powell noted in his press conference that if weakening conditions require it, the Fed can move quickly. The central bank can also move more slowly if inflation and macro conditions require a more gradual transition.

如上所述, today’s policy move reflects that the Fed has shifted from a primary policy focus of reducing inflation to balancing the goals of both price stability and maximum employment (with perhaps a greater concern being the labor market). Inflation does not need to be reduced to the central bank’s target of a 2% growth rate for the Fed to cut further; rather, inflation just needs to be on the path to reaching that goal (likely in late 2025 or early 2026).

The Fed’s economic projections imply an additional 50 basis points of rate cuts for 2024, followed by 150 more in 2025 and 2026. This FOMC projection implies a terminal federal funds rate for this cycle of approximately 3%, consistent with NAHB’s forecast for the medium-term outlook.

NAHB Chief Economist Dr. Robert Dietz delves into the impacts this action will have on both mortgage rates and builder and developer loans in this Eye on Housing post.