A Rate Cut from the Fed: What Will the Terminal Rate Be?

The Federal Reserve announced a 25-basis-point cut to the federal funds rate at its November meeting, lowering the top target rate to 4.75%. This move aims to drive inflation closer to the Fed’s 2% target. However, the Fed gave limited guidance on future rate cuts, even as bond market movements signal expectations. Since mid-September, the 10-year Treasury rate has jumped from 3.6% to around 4.3%, reflecting shifts in growth and deficit projections.

Federal Reserve's Economic Outlook

The Fed’s recent statement highlighted continued economic expansion and easing labor market conditions, while inflation remains somewhat elevated. The Fed emphasized its dual goals of maximum employment and stable inflation, noting that risks to these goals appear balanced. However, the uncertain economic outlook remains a concern, as the Fed seeks to adapt its policy to evolving conditions.



Election Impacts on Economic and Policy Outlook

The 2024 election outcome introduces new variables, potentially boosting economic growth, tightening the labor market, and increasing government spending. These factors could push inflation higher, despite possible benefits to the broader economy. As a result, the Fed may need to adjust its strategies into 2025, with economists speculating on a terminal federal funds rate that may range from 3.25% to 3.5%.

Fed Projections and Housing Market Implications

Additional insights from the Fed are expected at December’s meeting, where an updated Summary of Economic Projections will be released. Although the Fed doesn’t factor speculative fiscal policy changes into its forecasts, rising government debt could drive up long-term interest rates, affecting borrowers and financial markets.

In the housing sector, the recent rate cut is expected to reduce costs for builder and developer loans by about 25 basis points, potentially easing financing conditions. This shift is a positive development for housing affordability, as high construction and shelter costs have driven up inflation. Fed Chair Powell has noted that reducing rent inflation will take time, with housing sector activity currently described as “weak.”

Outlook for Future Rate Cuts

With inflation moderating—September’s core PCE inflation rate dropped to 2.7% from 3.7% a year prior—the Fed has room for further rate cuts. Analysts anticipate another 25-basis-point reduction in December, which would bring the top rate to 4.5%. Beyond that, the Fed could shift to one cut per quarter in 2025, with the final terminal rate likely to be reassessed based on economic trends and fiscal impacts. If you’re a Mortgage Loan Originator (MLO) looking to stay competitive in an evolving market, explore Innovative Mortgage Services' Compensation Plans. See how our tailored solutions can help you succeed in today’s dynamic economic environment. Learn more here.