Fed Rate Cut: Is the Market Expecting Too Much?

One of the most valuable things I've learned is that all frustrations come from missed expectations. 💡

In other words, the expectations we set matter a lot.

This not only applies to our personal lives, but it's relevant to the markets as well.

Each week, we get a number of economic updates from various sources. 📊

Things like how many people filed for unemployment, how many new houses were built last month, and so on.

Prior to the release of these reports, "experts" set expectations by proactively predicting what the reports will show. 🔮

In the stock market, if the reports come in as expected or better, you typically see prices rise. 📈

But if you miss expectations, prices can fall dramatically. 📉

The same applies to interest rates and the Fed.

Jerome Powell and the gang go out and give speeches and do interviews to manage peoples' expectations about what to expect with interest rates in the future. 🗣️

Like stocks, this can move interest rates up or down depending on what message is being delivered.

Are markets expecting too much?

Of course, the big news is the 0.5% rate cut the Fed just announced last week.

It's been a move everyone's been waiting for since the end of 2023. 🤩

Here's a look at where we've been and what the Fed's own projections are for the future: 

The Fed expects they'll slowly cut rates over the next 2 years with us ending about 2% lower than where we are by 2027.

The question we've got to ask ourselves is what does the market expect the Fed to do? 🤔

According to the futures market (fancy for saying bets the market's placed on what will happen), the market is expecting bigger rate cuts in less time.

📰 This quote from Reuters sums it up nicely:

"Expectations for interest rates by the end of next year remained roughly unchanged, with traders expecting some additional 190 basis points (1.9%) of cuts by the end of 2025, which is in line with 240 basis points (2.4%) in cuts expected prior to the Fed's rate cut on Wednesday.

That implies a benchmark rate of 2.9% by the end of 2025, which is below the 3.4% rate envisioned by Fed officials in updated projections that were released on Wednesday."

Finding Opportunity

Most people considering a real estate move are wondering if they should wait for even lower rates now that the Fed started cutting. 🙋‍♀️🙋‍♂️

We talked about this in depth at my latest coaching call and if you can address this question effectively, you'll be able to help your clients more than almost every other agent who won't have a clue.

In general, we've watched mortgage rates come down 2% since the high back in October 2023.. 

While most people believe that the Fed controls mortgage rates, the truth is the market moves ahead of the Fed.

The 2% drop in rates was triggered by (early) expectations that the Fed would cut rates.

If my math is mathing, rates have come down 2% and the market was expecting a 2.4% decline in the Federal Funds Rate. 🧮

This would suggest we've already gotten the benefit of the rate cuts without them actually happening yet.

✅ Bottom line: buyers today are getting the benefit of expected rates through 2027 and future Fed cuts likely won't push rates down further unless they're surprise cuts. 

The scenario we have to consider is how rates might move if we don't actually get the cuts the market is expecting?

Missed expectations in this case means higher rates.

If I were making a move, I'd take what I could get today rather than wait for an uncertain future. 🚀

Dr. Alex Stewart
Founder

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