On October 30th, the Federal Reserve approved a quarter point interest rate cut from 2% to 1.75% in order “sustain market expansion”, as promised by the Federal Open Market Committee in June. Despite the fallout from the U.S. – China trade war and the impending implications from Brexit, the U.S. economy and housing market continues to maintain steady growth, and this rate cut should help this growth continue through Q4 of 2019. Now is a better time than ever to purchase a new home or refinance at a lower rate.
Effective Federal Funds Rate, 2019
The Fed has had internal disagreements as to whether or not these cuts should continue, as this was the third rate cut this year. While President Trump has publicly stated that the Fed should keep cutting rates in an effort to stimulate economic expansion, multiple regional presidents of the Fed have maintained that the rate shouldn’t move down any further, and that it even should have been held constant at the prior level. It will be interesting to see how these rate cuts impact the economy in the long run: will this growth instrument prevent another recession or might it lead to inflation?
U.S. consumer confidence only slightly decreased from July to August despite trade tensions with China. Experts estimated that the market could see a large dip in August, but instead, this dip has been significantly smaller than predicted, signaling an optimistic general economic outlook. While other part of the economy have shown some weakness, the housing and labor market have remained strong, and now, bullish investors are hoping for resolution with China and a potential fall rally.
Expectations are still that the Fed will lower interest rates again in September due to trade tensions and slowing global growth, according to Reuters.com. As long as the tariff tension with China continues, the Fed will need to use monetary policy tools, such as rate cuts, to keep the economy strong. If the tension escalates and China retaliates to the U.S. tariffs on Chinese imports by taxing incoming U.S. goods, the high level of consumer confidence that we are seeing now will start to fall at a faster pace. But, on Monday, President Trump and Xi Jinping “called for calm” and Trump predicted that a deal would soon be in place.
These continuous rate cuts bode well for the future of the housing market. Nationally, home prices increased by 1.0% in the second quarter, and the increase in housing demand can directly be attributed to the favorable mortgage conditions brought about by the recent rate cuts. As long as these rate cuts increase the demand for real estate purchases, prices should hold strong entering the fall.