The Fed chose the more aggressive of two options by voting for an outsized 50 bps rate cut. Today’s rate cut was certain, but for the first time since 2007 the size of the cut was not clear ahead of time, with markets split almost evenly between 25 and 50 bps. By choosing the larger option, the Fed is acknowledging that:

1. Interest rates are too high, given how much inflation has fallen and how unemployment has ticked up, and
2. They are willing to act aggressively to get ahead of a weakening economy.

As Fed Chair Powell put it in the press conference: “This decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained.” The larger 50 bps cut could also be interpreted as making up for the missed opportunity to start cutting rates at their July 31 meeting, though Chair Powell pushed back on that view in his press conference. As a reflection of how close of a call this was, there was one dissent among the voting committee members for the first time since 2005.

The Fed’s projection, however, implies a slower 25 bps-at-a-time pace from here on out, slower than markets were anticipating. Futures markets were anticipating a bit more than 100 bps in cuts by the end of 2024 and 200 bps of cuts by the beginning of next summer. The Fed’s last projection from June called for only one 25 bps cut in 2024, but they updated that expectation today to include 100 bps of cuts in 2024. That implies a 25 bps cut each at each of their November and December meetings. They also projected 200 bps total of cuts by the end of 2025, implying a similarly slow or even slower pace of cutting in 2025. These projections fall a little short of market expectations and balance out their choice to cut by 50 bps today. Chair Powell doubled down on this in the press conference by saying that no one should look at the 50 bps cut today and interpret that as the new pace. In reality, projections are just projections and their actual actions will depend on the incoming economic data. As Chair Powell said, the Fed can go faster or slower as appropriate. They may not have wanted to signal additional cuts today to avoid spooking markets into believing that a recession is more likely than it is.

Mortgage rates are likely to tick up very slightly because markets were expecting a faster round of cutting ahead of today’s meeting. More aggressive Fed action may be needed to stimulate the housing market. Mortgage rates had fallen from around 7.5% in mid-April to 6.1% prior to today’s decision, as the Fed signaled their intention to start cutting. Following today’s announcement, mortgage rates are likely to remain relatively stable for the next couple of weeks. However, we’re in for a period of mortgage-rate volatility as the market awaits and reacts to economic data releases, starting with the next monthly jobs report. The housing market has not responded to lower rates to date (see chart below). Pending sales have continued to fall even as rates fell, a pattern not observed in the housing market in recent history. Housing is uniquely important to the Fed’s goal of stabilizing the economy as it is the most interest-rate-sensitive sector of the economy. While homebuyers may belatedly respond to lower rates because they were waiting for the Fed to act, it may also be that the Fed needs to signal a faster return to neutral in order for the housing market to play a meaningful role in preventing further economic weakness.