Weekend Talking Points - 'Cutting'

The first rate cut of 2025 was both well-telegraphed by the Fed, and anticipated by the markets. Average mortgage rates are at their lowest levels in a year, and are only 20–25 basis points (0.20%-0.25%) from being at their lowest levels in 3 years! Summer may be over, but these lower mortgage rates are definitely going to heat up transaction activity — if they can last.

Rising CPI added to the Fed’s dilemma. August “headline” CPI (Consumer Price Index = inflation for you and me) accelerated to an annual rate of +2.9% year-over-year (from +2.7% YoY in July). This was the 4th-straight month that the annual “headline” CPI rate had increased. “Core” CPI was steady at +3.1% YoY, but remained well above the Fed’s 2% target.

TP: Remember, the Fed’s preferred measure of inflation is the “core” PCE, which puts a far smaller weight on “shelter” costs (rent + home ownership) than the CPI does. Separately, it can’t be a coincidence that inflation started climbing again in April, which is when President Trump announced the “Liberation Day” tariffs.

Retail sales surge, but mind the inflation. Private Consumption (that’s you and me buying goods & services) drives 65–70% of US GDP. That’s why retail sales is such an important metric for gauging overall consumer sentiment. In August, retail sales grew 0.6% month-over-month (well ahead of expectations of +0.2%) and 5.0% year-over-year, while “core” retail sales (which excludes gas and vehicle sales) rose 0.7% MoM. Despite rising debt levels (credit cards etc.) and tariff concerns, American consumer spending remains remarkably robust. [Census Bureau]

TP: Keep in mind that the retail sales figure is NOT inflation adjusted. In other words, it captures (is skewed upwards) by price increases.

Fed “drama” can’t be understated. We had Trump appointee Stephen Miran (just confirmed as the temp Governor) vote, attempted Trump ‘firee’ Lisa Cook vote, aspiring Fed Chair Chris Waller vote, and current Fed Chair (and public Trump whipping boy) Jerome Powell vote. There must have been some serious tension in the air in what are typically consensus-seeking meetings.

But the Fed still cut rates by 25 bps. For the first time in 2025, the FOMC (Federal Reserve’s Open Markets Committee) voted to cut short-term interest rates by 25 basis points (that’s 0.25% or one-quarter of a percentage point) to a target range of 4.00%-4.25%. This move was:

• Well-telegraphed by the Fed (Jerome Powell’s Jackson Hole speech on 8/22),
• Well-supported by the weak August BLS jobs report (and subsequent huge, downward QCEW revisions), and
• Well-anticipated by the bond market (US 10-yr treasury yields approaching 4.00%; average 30-yr mortgage rates near 4.20%)

Bond yields (and mortgage rates) steady. Given the strong moves we’ve already seen, the risk was that bond yields and mortgage rates might RISE after the Fed announcement. This is the classic ‘buy on rumors, sell on fact’ trading strategy.

But US treasury and mortgage-backed securities (MBS) yields were relatively steady on Wednesday afternoon. Moreover, the Fed Funds Rate futures market is still pricing in a 90% probability of a rate cut on October 29, and an 82% probability of a rate cut on December 10.

Builder confidence remains low, but outlook is improving. With mortgage rates dropping, you’d expect builder confidence to rise. But it didn’t. At least not yet. In September, the National Association of Homebuilders’ confidence index (overall HPSI — green line below) was flat at 32 (>50 = bullish). However, the forward-looking component (yellow line below) rose 2 points to 45 (not far from bullish territory); that’s the highest it’s been in 6 months.

Bond and Mortgage Market

In the days leading up to the Fed meeting, 10-year US treasury yields dropped very close to 4% and average 30-year mortgage rates got as low as 6.13%. Lenders were clearly not wanting to miss the expected surge in refinance volumes — which we certainly got: the Mortgage Bankers Association’s Refi Index jumped 58% week-over-week and is up 70% year-over-year.

With that in mind, the risk was always that US treasury yields and mortgage rates might rise on the day of the Fed’s rate decision. While that did happen, it was a modest retracement. US 10-year treasury yields are at 4.05% today, and average 30-yr mortgage rates are at 6.22%.

Importantly, the market is still pricing in 2 more rate cuts before year-end 2025. In fact, market certainty of rate cuts has INCREASED since the Fed meeting. Why? Because the Fed members’ latest “dot plot” forecasts suggest faster/more rate cuts ahead.

Here’s what the market is currently expecting from the final three FOMC meetings of the year:

Note: The Fed Funds Rate policy range (after the 25 bps rate cut this week) is now 4.00–4.25%.

• October 29 FOMC Meeting: 90% probability that rates will be 25 bps below current (was 75% last week), in other words, another 25 bps rate cut in late October.
• December 10 FOMC Meeting: 82% probability that rates will be 50 bps below current (was 70% last week). That implies a 25 bps rate cut at each of the two meetings before year-end.

They Said It

“We have begun to see goods prices showing through into higher inflation, and actually the increase in goods prices accounts for most of the increase in inflation, or perhaps all of the increase in inflation over the course of this year…those are not very large effects at this point, [but] we do expect them to continue to build over the course of the rest of the year and into next year.” — Jerome Powell, Federal Reserve Chairman, discussing the impact of tariffs

“While builders continue to contend with rising construction costs, a recent drop in mortgage interest rates over the past month should help spur housing demand.” — Buddy Hughes, NAHB’s Chairman