Fed Chair Powell Finally Signals Rate Cuts. Mortgage Rates Down Already.

Fed chair Jay Powell gave a speech today signaling lower rates are coming. The speech is linked in full below, and there are two key excerpts worth noting.

The first key excerpt is about the job market deteriorating:

“…downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”

WHY SEPTEMBER 17 FED CUT IS 89% PROBABLE

The Fed’s ‘dual mandate’ requires it to balance 2 goals:

First, the Fed must keep inflation under control – which they do with higher rates.

Second, they must keep the job market as strong as possible – which they do with lower rates.

Powell made the comment above today because of how fast the job market weakened this summer.

The July jobs report released August 1 showed the U.S. economy created just 35,000 new jobs per month during May, June, and July. This is the worst since the pandemic.

Then on August 12, July monthly Core CPI inflation came in as expected at 0.3% (and annual Core CPI was 3.1%).

As such, the odds of a 0.25% Fed cut in September are now 89.3% according to CME futures.

MORTGAGE RATES DROP BEFORE FED CUTS

The good news is that mortgage rates don’t have to wait for Fed cuts to come down — because rates drop in real-time when mortgage bonds rally as Fed cut probabilities rise.

On July 15, Mortgage News Daily reported 6.875% mortgage rates, and after the July jobs report hit on August 1, mortgage rates dropped .375% to 6.5%.

On a $400k mortgage, this rate drop saves borrowers $100 per month.

Today’s bond market interpretation of Powell’s comments may even bring rates down a bit lower — to about 6.375%.

This is great for borrowers, but could reverse if inflation readings heat up before the September Fed meeting.

So if you’re a homebuyer on a clock, then it’s a great week for you.

And if you’re a homeowner who bought a home since 2022, rates in the 6.375% to 6.5% range may provide great refinance opportunities.

TARIFF INFLATION MAKES DEEP FED CUTS UNLIKELY

The second key excerpt from Powell’s speech today is on the “they must keep inflation under control” side of the dual mandate:

The effects of tariffs on consumer prices are now clearly visible. We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts. The question that matters for monetary policy is whether these price increases are likely to materially raise the risk of an ongoing inflation problem.

If this proves true, the job of the Federal Open Market Committee (FOMC) — not Powell himself — is to ensure inflation doesn’t spike again, which means they’d keep rates higher.

This is the complication of the Fed’s dual mandate. It’s a very tough balance, and there is always extreme pressure on either side of the mandate.

Today, that pressure is overwhelmingly on the “they must keep the job market as strong as possible” side of the dual mandate.

But if the FOMC cuts rates too much to fuel stronger jobs growth, it would risk reigniting inflation — especially in the context of Powell’s tariff risk comment above.

The full speech is linked below.

Please reach out with any questions.

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Reference:

– Speech by Chair Powell on the economic outlook and framework review (Federal Reserve)