The Federal Reserve's Federal Open Market Committee (FOMC) has announced a significant reduction in the short-term federal funds rate at its September meeting. This marks the beginning of a series of rate decreases aimed at normalizing interest rates and balancing monetary policy risks between inflation and labor market concerns.
The FOMC reduced its top target rate by 50 basis points from 5.5% to 5%, a larger cut than projected by the National Association of Home Builders (NAHB). In its statement, the FOMC noted: “Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.”
Today's action is expected to be the first in a series of federal funds rate cuts, with an ultimate goal of reducing the top target rate to approximately 3% as inflation moves closer to the Fed's target of 2%.
Fed Chair Jerome Powell indicated that future cuts could be adjusted based on economic conditions. "If weakening conditions require it, the Fed can move quickly," Powell stated. He also mentioned that adjustments could be more gradual if necessary.
The shift in policy reflects a change from focusing primarily on reducing inflation to balancing price stability and maximum employment, with an increased concern for the labor market. The Fed's projections imply additional cuts totaling 200 basis points over 2024, 2025, and 2026, aligning with NAHB’s medium-term outlook.
NAHB Chief Economist Dr. Robert Dietz discusses the implications for mortgage rates and builder loans in his Eye on Housing post.
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