Earlier this week, the Fed held its July meeting and voted to keep interest rates unchanged. This was widely anticipated by the market and came as little surprise, although how the FOMC arrived at the decision drew attention.
No Cut, Two Dissents
For the first time since 1993, two members of the committee dissented to the decision, instead favoring a 0.25% interest rate cut. After the previous Fed meeting and prior to dissenting, Christopher Waller and Michelle Bowman were in the media saying they were becoming more open to cutting interest rates. In a speech two weeks ago, Waller said:“… a host of data argues that monetary policy should be close to neutral, not restrictive. Real gross domestic product (GDP) growth was likely around 1 percent in the first half of this year and is expected to remain soft for the rest of 2025, much lower than the median of FOMC participants' estimates of longer-run GDP growth.
“Meanwhile, the unemployment rate is 4.1 percent, near the Committee's longer-run estimate, and headline inflation is close to our target at just slightly above 2 percent if we put aside tariff effects that I believe will be temporary. Taken together, the data imply the policy rate should be around neutral.”
Waller’s view, implying that the balance of risk has shifted so that inflation no longer needs to be the sole focus of monetary policy, is not out of consensus when reviewing the economic data. However, it is important to factor the volatile policy environment into any analysis related to monetary policy. The impact of tariffs, as we’ve long stated, will take time to appear in the hard economic data.
The Fed remains in a difficult position. It does appear that the committee is becoming more comfortable with the idea that the impact of tariffs may be transitory. (Although it would never use that word again!)
As Chair Powell stated in his press conference, the Fed’s goal with future rate cuts is to be “efficient.” Quickly cutting rates just to raise them again to combat unforeseen inflation would be inefficient, he elaborated.
The quiet meeting this week should set up a more dramatic meeting in September. The market is widely viewing this meeting as “live,” meaning there is a chance that the Fed resumes cutting. As of Thursday, the fed fund futures market was forecasting a 39.2% chance of a cut in September. After the jobs report published Friday morning, this measure jumped to 79.3%.
What About Mortgage Rates?
The Trump administration has not been shy in its monetary policy commentary, arguing that the Fed needs to start cutting rates soon to avoid being too late.Some in the administration are also openly arguing that, with a slowing housing market, cutting rates can offer some relief. Although this argument is not inherently false, it’s worth looking at how mortgage rates have behaved since the most recent rate cutting cycle began last September.
This chart below shows the average 30-year mortgage rate over the last 12 months. When the Fed initially cut rates by 50bps in September 2024, mortgage rates did quickly decline. Since then, however, mortgage rates have returned to previous levels and remained stubbornly elevated—even though the Fed cut rates two additional times.
It’s important to remember that mortgage rates more closely follow the 10-year Treasury instead of the short-term interest rates set by the Fed. The 10-year has remained stubborn throughout the recent cycle due to volatile expectations around inflation, growth and economic stability that have dominated the last few months.
Will interest rate cuts be beneficial for mortgage rates? They can certainly help, but the story is a bit more complicated.
