The Federal Reserve lowered its benchmark interest rate on Wednesday by 50 basis points (bps) to a range of 4.75% to 5%, turning an important corner in the central bank’s fight against inflation. The cut is the first since March 2020 after the Fed raised interest rates to a 23-year high point to cool the economy and quell inflation. 

With both inflation and the labor market cooling, economists and housing professionals alike had expected the Fed to cut borrowing costs in September, with the big question being how large the cut would be. 

Generally, the Federal Open Market Committee (FOMC) tends to raise or slash interest rates by increments of 25 bps, but they can move faster when they think their rate stance isn’t well aligned with the balance of risks. In 2022, the central bank upped rates by increments of 50 and 75 bps to fight 40-year-high inflation. 

Fed Chair Jerome Powell told reporters at a post-announcement press conference that central bankers have digested a lot of data since their previous meeting at the end of July, when they chose to leave rates unchanged. This included two employment reports and two inflation reports.

“We took all of those … and we thought about what to do, and we concluded that this was the right thing for the economy, for the people that we serve,“ Powell said of the 50-bps cut.

The FOMC’s Summary of Economic Projections shows that most officials project further cuts by the end of 2024. And the majority also predict a target range below 3.5% by the end of next year, which would represent a 2-point drop from the previous peak. Policymakers are scheduled to meet again in early November and mid-December.

The Consumer Price Index — the Fed’s preferred inflation gauge — posted 2.5% growth for the year ending in August, down from 9.1% in the summer of 2022. At the same time, the unemployment rate rose to 4.2%, up from a recent low point of 3.4% in April 2023.

With the recent weakening of labor data, some analysts have wondered whether the Fed’s lack of movement prior to this point has caused them to be behind the curve.

“We don’t think we’re behind. We think this is timely,” Powell said Wednesday. “But I think you can take this as a sign of our commitment that we don’t want to get behind”

Many market observers had flipped their expected cut from 25 bps to 50 bps without any key data release as a catalyst. On Wednesday morning, the CME Group‘s FedWatch tool showed that 55% of traders expected officials to slash rates by 50 bps while 45% projected a smaller cut of 25 bps. Less than a month ago, 71% of traders leaned toward a rate cut of 25 bps.

Mortgage rates, which often correlate with the 10-year Treasury yield, have trended down in recent months. At HousingWire‘s Mortgage Rates Center on Wednesday morning, the average rate for a 30-year conforming loan was 6.31%. That figure was down 13 bps from a week ago and 27 bps lower than two weeks ago.

“The Fed’s 50bp rate cut likely adds downward momentum for mortgage rates, which have already come down materially since May as treasuries have rallied,” Eric Orenstein, senior director at Fitch Ratings, said in a statement.

“While not enough for a full scale refi boom, an average 30-year rate approaching 6% does open up a meaningful slice of the market for refinancing. Mortgage originators stand to benefit, and will likely find the toughest times already behind them.”

“Given the anticipated rate cuts this week, the bond markets and 30-year mortgage rates have already reacted, and those rates have meaningfully come down,” said Charles Goodwin, senior director of sales at Kiavi. “I believe we need to see rates come down further before housing really picks up.”

According to JP Kelly, senior vice president of mortgage at MeridianLink, Wednesday’s rate cut will give an immediate boost to purchasing power for potential homebuyers. But still-high home prices and limited amounts of available inventory may not mean much in practical terms.

“Short of an explosion of homebuilding to relieve inventory constraints, rates dropping to around the mid 5% [range] and negating the lock-in effect is our best hope for spurring real movement in the housing market,“ Kelly said.

Keller Williams chief economist Ruben Gonzalez also expressed restraint in his expectations for home sales in the near term.

“While rates may continue to fall as the Fed provides more guidance on its future monetary policy, the majority of the adjustment in mortgage rates appears to have already been priced in,” Gonzalez said. “In August, home sales remained sluggish, even with declining mortgage rates, signaling that buyers may still be cautious despite improved financing conditions.”

As the November election draws closer, interest rates have become more of a political issue. Republican nominee Donald Trump previously said he did not support interest rate cuts prior to the election, while many Democratic lawmakers — including Sen. Elizabeth Warren of Massachusetts — have voiced support for them.

In response to a reporter’s question about the political ramifications of Wednesday’s rate cut, Powell stayed tight-lipped.

“This is my fourth presidential election at the Fed and it’s always the same,“ he said. “We’re always going into this meeting in particular [the last one before the election] asking, ‘What’s the right thing to do for the people that we serve?’ And we do that and we make a decision as a group.

“Our job is to support the economy on behalf of the American people. … We don’t put up any other filters. I think if you start doing that, I don’t know where you stop, and so we just don’t do that.”