Interest Rate Update: Recession Predictors Could Be A False Positive

We’re rubbing our eyes and looking twice at these stats – is our real estate market starting to make the recovery we’ve been discussing for the last couple of years? It seems so!

That may be hard for potential buyers and sellers to believe, considering how often experts have been wrong about when we’d see rates drop. But check out the changes in the economic factors and conditions the Federal Reserve is using to determine when they’ll start making cuts:  

• INFLATION: Inflation’s downward trend continues! The Consumer Price Index (CPI) without Food and Energy was 3.3% at the end of June (the July rate is predicted to be lower). Considering this time last year, the Core CPI rate was 4.7%, and economists are encouraged by the progress (even if it is slow). The Federal Reserve wants it to reach 2% before it drops interest rates.

• SPENDING: When Americans spend less, the economy slows, which triggers a rate drop. However, the most recent Consumer Sentiment Report (which focuses on how we feel about our savings and wealth-building accounts) shows a month-over-month decrease of 66.4% in July compared to 68.2% in June. Fewer people are optimistic about spending, and it shows. Retail sales have slowed over the months as people are being picky about how they spend their money (even fast food chains like Mcdonald’s have slowed in sales). The Federal Reserve wants to see a significant drop in spending before they reduce the Federal Rate. 
• JOBS: Now, THESE latest reports are major news. With big companies’ massive layoffs and small businesses slower hiring, unemployment claims rose in July to 4.3%. New jobs took a shocking hit as only 114,000 were added in July (versus the 206k we saw in June). And wage increases seem to be near a standstill, as we only saw a 0.2% increase. The Federal Reserve has said they’ll consider cutting rates when unemployment reaches 4.4%.

See Our Economy’s Progress: March 2023 Interest Rate Update

These economic shifts have already caused markets to lower their rates. The mortgage industry didn’t wait for the Federal Reserve. Last month, we saw the 30-year Fixed bottom out at 6.4% – the lowest in 52 weeks! Fed Chair Jerome Powell expressed in his latest press conference that a September rate cut could be on the table. “The broad sense of the committee is that the economy is moving closer to the point at which it would be appropriate to reduce our policy rate,” he said. “The question will be whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market…”

Powell said. “If that test is met, a reduction in our policy rate could be on the table for as soon as the next meeting in September.”

Read: Our Market is Correcting – Not Imploding

So, the Federal Reserve will carefully analyze reports about inflation, spending, jobs, and more to determine if they are ready to decrease the bank rate. While the cut may only be 0.25%, it will be the first in over two years. Hopefully, this will be the first of many cuts over the next year. Remember, the Federal Rate does not directly shift the mortgage rate, it has a trickle-down impact on many rates, including mortgages, car loans, credit cards, and more.

THE GREAT NEWS: Lenders want to get business done. They continue to create new products and programs so many buyers can have significantly lower rates. Ask your RE/MAX Alliance agent for local, excellent mortgage broker referrals. The lack of competition among buyers means your chances of finding the right home and negotiating with sellers are better than the frenzy we experienced in 2021-2022. So don’t speculate whether you can afford to purchase based on the headlines or online calculators. Contact your RE/MAX Alliance agent and get the resources, advice, and support so you are confident if now is the time to move ahead or not. 

Sources: sifma.org, freddiemac.gov, conference-board.org, Bureau of Labor Statistics, Forbes, CNBC.com