Fed Cuts Rates for Third Time in 2024

The Federal Reserve closed out 2024 with a 25-basis point cut, its third rate consecutive rate cut since September.

At its December meeting, the Federal Reserve Open Market Committee (FOMC) elected to lower the target range for the federal funds rate by 25 basis points to a target range of 4.25% to 4.5%. The Fed cut rates for the first time in four years with a 50-basis point cut in September, followed by a 25-basis point cut shortly after the election in November.

Zonda chief economist Ali Wolf says the Fed’s decision and magnitude of its cut were both expected. Additionally, she says the Fed was expected to signal fewer cuts next year than originally projected, which they also did.

“What all of this means for the housing industry is complicated. There was a close to unanimous belief a few months ago that mortgage rates were going to trend down in 2025,” Wolf says. “While we do still believe mortgage interest rates will be lower next year, any kind of drop will likely be muted. Put a different way, the home building industry should expect more of the same in 2025. High home prices, high mortgage rates, and consumers trying to make sense of it all will likely be a constant moving into next year.”

National Housing Conference president and CEO David Dworkin said the reduction in short-term interest rates is “an important step” toward aligning interest rates with the broader economy.

“However, it is unlikely this is going to have a significant impact on mortgage rates in the near term,” Dworkin said. “Ultimately investors must be more convinced that inflation is on a permanently downward trend before we see long-term rates come down as well. Until then, the cost of housing will remain too high, and unless we build more housing that is affordable to most Americans, it is going to stay that way.”

In its announcement, the Fed said recent indicators suggest economic activity has continued to expand at a “solid pace.” Labor market conditions have “generally eased” since earlier in the year and the unemployment rate “has moved up but remains low,” according to the Fed. In November, total nonfarm payroll employment rose by 227,000 while the unemployment rate remained at 4.2%.

Inflation has also made progress toward the Committee’s 2% objective, but remains somewhat elevated. The Consumer Price Index (CPI) increased 0.3% in November and posted annual growth of 2.7%. The CPI has posted below 3% growth on an annual basis since June, but above the Fed’s target of 2%.

“The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance,” the FOMC said in its statement announcing the 25-basis point cut. “The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”

The Fed said it will continue to monitor “the implications of incoming information for the economic outlook” in assessing its stance of monetary policy.

Wolf says she is watching for a “mindset shift” as it relates to the housing market.

“A few months ago, consumers were sitting on the sidelines waiting for interest rates to come down,” Wolf says. “It’s become clear that mortgage rates are not going to drop as much as originally expected. Will those consumers remain on the sidelines challenged by affordability, or will they get into a place of acceptance and say ‘I need to buy a new/different house and am sick of putting my life on hold.’”