That was the subject line on an end-of-day email from one of the major business media enterprises on a Wednesday afternoon in mid-September. It was the day the Fed held its regular meeting, and ended speculation as to whether the all-but-assured rate cut would be 25 basis points, or a more aggressive 50 points.
And 50 it was, but it seems there was an obvious debate among the Fed Governors at the meeting; for the first time in two decades, one governor cast a dissenting vote, arguing for the smaller, 25 basis point cut. Of course the stock markets dropped that day, as traders fell in lockstep on their unwavering mantra: “Buy on the rumor, sell on the news.”
We Could Not Have Asked For More. There were signs earlier that it was a foregone conclusion the first cut was coming when the Mortgage Bankers Association released its weekly survey of mortgage applications, which climbed 14.2% on a seasonally adjusted basis for the week ending Sept. 13, the date of the Fed meeting. What’s more, the applications rose 26% on an unadjusted basis in just one week’s time, a byproduct of sinking mortgage rates and anticipation of further drops.
And new mortgage activity wasn’t the only winner; refinance activity was particularly pronounced, jumping 24% from the previous week and 127% year-over-year. And housing and the mortgage markets were not the only sectors anticipating a positive response to the rate cuts; it turns out the Dodge Momentum Index, a benchmark that measures nonresidential construction planning, ticked up 2.9% in August, with most nonresidential sectors posting growth.
The September policy action marks the beginning of a series of rate decreases necessary to normalize interest rates and to rebalance monetary policy risks between inflation and concerns regarding the health of the labor market.
With the progress on the inflation battlefield, September’s action is the beginning of a series of federal funds rate cuts which ultimately should decrease the top target rate to approximately 3% in the coming quarters, as the rate of inflation moves closer to the target rate of 2%. The pace of these expected future cuts is somewhat open to debate, but Fed Chair Powell noted in his press conference that if weakening conditions require it, the Fed can move quickly. The central bank can also move more slowly if inflation and macro conditions require a more gradual transition.
Policy Statement. The Fed was clear the economic outlook is uncertain, and the committee is attentive to the risks to both sides of its dual mandate. The Fed also noted that, as they are considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.
Projections released following their two-day meeting showed a narrow majority, 10 of 19 officials, favored lowering rates by at least an additional half-point over their two remaining 2024 meetings. Seven policymakers supported another quarter-point rate reduction this year, while two opposed any further moves. Clearly the jury is out on how many and how large the rates cuts will be before year end, but my bullish view is that we will be down 100 basis points, or a whole percentage point, by Christmas.
The popular business press was quick to gauge the reaction of construction executives, saying the move is the start of broader easing likely to spur new project starts. A series of rate cuts over the next three to six months will likely start to show up in lower construction loan rates and greater availability of equity investment toward the end of this year and into next year. As rates come down, borrowing costs will also come down for many projects, and there will be more real estate investment and construction activity.
Despite an overall positive reaction to the cut, construction executives said the full impact of lower rates will take time to materialize as financing terms and project planning processes catch up to the new environment. Construction activity tends to be a lagging indicator in the economy, so the industry’s long project cycles mean any uptick in activity will be gradual.