After years of keeping interest rates higher to choke off inflation, Federal Reserve officials are openly talking about the need to soon start cutting rates. Fed President Austin Goolsbee says June’s Consumer Price Index (CPI) shows many prices have leveled off and even come down, and it's time for policymakers to reassess things.
“We set this rate when inflation was over 4%, and inflation is now, let’s call it, 2.5%,” Goolsbee said in an interview with the Wall Street Journal. “That implies we have tightened a lot since we’ve been holding at this rate.”
The Fed last boosted its federal funds rate in July 2023, pushing it to its current level of 5.25% to 5.5%. That rate directly affects the interest rate consumers pay on credit cards and auto loans.
Currently, credit card interest rates are at a record high. Auto financing is also pricey and may be partly responsible for the slowdown in new and used vehicle sales.
Fed Chairman Jerome Powell is also on record, suggesting it may be time to consider lowering interest rates. In a speech to the Economic Club of Washington, DC, Powell said it’s not necessary to wait for inflation to hit the Fed’s target of 2% before lowering rates.
Inflation target in sight
“The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%,” Powell said.
The Fed meets this month but the betting on Wall Street is that policymakers will wait until their September meeting to make the first interest rate cut.
But what does that mean for mortgage rates, which lately have bounced just above or just below 7%? To get a handle on the future of mortgage rates, you need to look at the 10-year Treasury bond.
Mortgage rates are linked to the interest paid on that bond, and the rate rises or falls depending on a lot of influences. This week, the yield on the 10-year note posted its largest increase in two weeks, suggesting that mortgage rates will rise again over the next week or so.