Expert Economists Predict Rate Cut Effects: Ho-Hum to Bullish

Mike Fratantoni from the MBA, Frank Nothaft from Core Logic, and Doug Duncan from Fannie Mae share their predictions with Dave Stevens on the impact of the latest rate cut.

The Federal Reserve Open Markets Committee voted to lower the federal funds rate by another 25 basis points setting the target range between 1.50-1.75%. Consistent with recent cuts there were two members, Esther George of Kansas City and Eric Rosengren of Boston, voting against these cuts arguing now is not the time to cut rates. The announcement interestingly excluded the language used in previous cut announcements that said they are committed to “act as appropriate to sustain the expansion” suggesting that they may have a softer commitment to future cuts.

So what does this mean to forecasts and market conditions? We asked three renowned expert economists in the field, Mike Fratantoni from the MBA, Frank Nothaft from Core Logic, and Doug Duncan from Fannie Mae

 

Michael Fratantoni, Chief Economist at the Mortgage Bankers Association:

“Markets widely expected that the Fed would cut their target rate by 25 basis points at their October meeting, and the Fed met those expectations. Also as expected, the committee remains divided, with two voting members who dissented in favor of keeping rates unchanged. We expect this rate cut will help support the economy through a patch of very slow growth in the first part of next year, but do not expect further cuts from the Fed this cycle unless the economy definitely looks headed for a recession. This cut was in our baseline forecast, and hence does not change our outlook for 2019 or 2020 originations.”

 

Frank Nothaft, Chief Economist at Core Logic:

Lower interest rates are a shot-in-the-arm for the construction and home sales markets. Builder loans should be less expensive, and home mortgage rates, especially for ARMs, should continue to be low. The past few months has marked the first time in the post-World War II era that we have had both the national unemployment rate and the 30-year fixed-rate mortgage rate below 4% at the same time. The rate cut is likely to extend this favorable environment well into next year.The market had expected the cut so the cut itself should not have been expected to move markets and did not. However, what had the potential to move markets was how the Fed characterized their rationale. The implication is that the Fed has a healthier view of the economy and the market was slightly disappointed that more support was not forthcoming.”

 

Doug Duncan, Chief Economist at Fannie Mae:

Mortgages won’t move much as a result. We retain an additional cut in our Q1 2020 forecast which is entirely conditional on whether the Fed’s view is revealed to be correct or not. What are the risks? Currently the market is once again hopeful that trade negotiations with China will conclude sometime soon with at least an interim agreement delaying the worst potential tariffs. This has brought rates up somewhat from their lows of 2019. If that occurs and results in lower uncertainty, the seeds of increased business investment could sprout and drive growth, and interest rates, up. Failure on both these points would drive rates the other way. In any case, on a relative basis, we expect a significant period of low interest rates. In light of the Fed’s continuing commitment to be “data dependent,” to the extent that trade uncertainties and other global risks remain unmuted, we continue to forecast an additional rate cut in January.”

 

For the team at Mortgage Media, we recognize the difficulty in predicting the future of economic activity given the volatile global economic conditions that could affect rates going forward, but its helpful to have as much information as possible for business leaders to set strategic plans over the months ahead.

 

 

David H. Stevens, CMB, is former SVP of Single Family at Freddie Mac, former EVP at Wells Fargo Home Mortgage, former President and COO of the Long and Foster Realty Companies, former Assistant Secretary of Housing and FHA Commissioner, former CEO of the Mortgage Bankers Association