6-Feb-19 – After a two-day meeting of the Federal Reserve Board’s Open Market Committee on January 30, the Fed said it would leave interest rates unchanged and promised in the future to be patient when evaluating the nation’s economic health.

“In light of global economic and financial developments and muted inflation pressures, the committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,” the Fed said.

The Open Market Committee said it will maintain its target range for the federal funds rate at 2.25 to 2.5 percent.

As a result of the Fed effectively taking its foot off the interest rate peddle, the rate on 10-year Treasury bonds – the driver of long-term mortgage charges – eased to 2.69 percent from 2.71 percent. And Wall Street liked the news. The Dow Jones stock market average skyrocketed 434 points to close above 25,000.

On January 31, Freddie Mac’s Primary Mortgage Market Survey reported that average 30-year fixed-rate loans remained relatively flat at 4.46 percent compared with 4.45 percent a week earlier, after weeks of moderating. A year ago, benchmark 30-year fixed loans averaged 4.22 percent.

Chicago-area lenders were charging a range of 4.256 to 4.57 percent on 30-year fixed-rate mortgages on January 31, reported RateSeeker.

Fed Chairman Jerome Powell (left) said that while the economic forecast remains strong, there are “cross-currents” and “conflicting signals” to consider, citing a slowdown in growth in major foreign economies. Interestingly, the committee did not include any language in reference to “further gradual increases” as it has in the past, signaling to some that a decrease could be on the horizon.

Powell also said several political uncertainties – including United States trade tensions, Brexit, and fallout from the government shutdown – have contributed to the Fed’s new patient approach.

In keeping with the cautious tone, the Fed also said it was ready to slow or even reverse the reduction of its $4 trillion bond portfolio, a sharp move away from its December pledge to reduce its holdings.

Slowdown could slash fed funds rate

New data from Capital Economics, an independent macroeconomic research firm, suggests an oncoming economic slowdown that could push the Open Market Committee to slash the federal funds interest rate.

“With equity markets rebounding from their recent lows, economic growth solid, and core inflation close to two percent, we still think the Fed will raise rates once more, either at the April-May or June 2019 meeting,” Capital Economics predicted. “Further ahead, however, we expect a sharp slowdown in economic growth will force the Fed to cut rates by 0.75 percent in 2020.”

If that scenario happens, Chicago home buyers likely would have an opportunity to lock in a 30-year fixed mortgage in the 3.5 to 3.75 percent range in early 2020, experts say. They also say lower mortgage rates in 2020 could potentially be the boost the housing sector needs because more and more lenders are reporting a decline in both loan origination and revenue volumes. However, rate reductions are often an indicator of a struggling economy, which also means consumer spending could weaken.

“My best guess is that rates in 2020 are more likely to be down than up,” predicted Tendayi Kapfidze, chief economist for LendingTree.

Mortgage rates may be lower in this scenario, said Ruben Gonzalez, chief economist for the Keller Williams real estate brokerage chain, but typically home sales will drop with consumer spending. “I would say we would likely see a steeper drop in home sales in 2020 if we get into a situation where the Federal Reserve is actively dropping rates,” said Gonzalez (right).

Gonzalez said what happens in 2020 is largely going to be dictated by “how the macroeconomic outlook changes” over the year.

“Without a recession, we think home sales are likely to flatten out at a slower pace and price growth likely will as well,” he said.