Mortgage Rates Were Falling Before Fed Signaled Rate Cut

WASHINGTON—The Federal Reserve is prepared to cut interest rates this week for the first time since 2008, but the biggest source of debt for U.S. consumers—mortgages—has been getting cheaper since late last year.

Mortgage rates have fallen recently to the lowest levels since late 2016, tracking a broader slide in U.S. Treasury yields. The average rate on a 30-year, fixed-rate mortgage was 3.75% last week, down from 4.94% in November, according to Freddie Mac.

“The most significant impact of an expected Fed rate cut is already upon us,” said Greg McBride, chief financial analyst at Bankrate.com, referring to the drop in mortgage rates.

The decline contrasts with trends in other consumer rates since the Fed last tweaked monetary policy in December by raising its benchmark federal-funds rate by a quarter-percentage point to a range between 2.25% and 2.5%.

The cost of auto loans, which rose only modestly as the Fed tightened policy from 2015 through last year, has fallen less than mortgage rates since December. The average rate on a five-year, new-car loan was 4.72% last week, down from 4.93% in mid-December.

Consumer rates that tend to more closely hew to Fed policy decisions rose in the weeks after its December rate increase, and have remained mostly steady since. These include the average rate on variable credit-card debt, which was 17.85% last week, up from 17.6% in December, and the average rate for a home-equity line of credit, which was 6.74% last week, up from 6.27% in December, according to Bankrate.com.

“The big change has been in mortgage rates,” said Tendayi Kapfidze, chief economist at LendingTree.

While the decline in mortgage rates hasn’t done much to lift U.S. home sales from their slump, it has important implications for homeowners, buyers and the broader U.S. economy. Mortgages accounted for two-thirds of the $13.67 trillion in U.S. household debt in the first quarter, according to the New York Fed.

For home buyers or owners looking to refinance their mortgages, the lower rates could easily save thousands of dollars over the life of a loan or enable them to purchase a bigger house than they could have afforded in December. The decline in mortgage rates since then would shave $175 off the monthly payment on a $250,000, 30-year loan.

“The interest rate is certainly appealing,” said Kay Spiva, a realtor in Abilene, Texas, where a growing population has helped the local housing market buck the national trend. “We’ve been strong to start with, and if the interest rates go down, I can only see that continuing.”

Because they are typically paid off over decades, mortgage rates are more correlated with 10-year Treasury notes than with the short-term rates controlled by the Fed.

But in recent months, 10-year yields have responded to many of the same factors that have convinced Fed policy makers to lower interest rates at their policy meeting Tuesday and Wednesday.

Concerns about Brexit, rising trade tensions and slowing economic growth in Asia and Europe have prompted several central banks around the world to ease monetary policy. Negative interest rates outside the U.S., combined with expectations of weaker economic growth and soft inflation have weighed on long-dated Treasury yields.

Fed officials were prepared to cut rates by a quarter-percentage point after their two-day policy meeting concludes Wednesday. While such a move may or may not pull mortgage rates any lower, it could eventually filter into shorter-term rates such as credit cards.

But economists say the overall impact of a Fed rate cut on U.S. consumers is likely to be muted.

In part, that’s because the two categories of household debt that have grown the most during the current expansion—student and auto loans—tend to have fixed rates that don’t move in lockstep with the fed-funds rate, economists at Wells Fargo said in a research note this week. Adjustable-rate mortgages and credit-card debt have shrunk, they noted.

It’s also because consumers were already doing fine at a time of low unemployment, rising wages and muted inflation.

Consumer spending grew at an inflation-adjusted, annualized pace of 4.3% in the second quarter from the previous three months, the Commerce Department said Friday, underpinning broader economic growth.

“Consumers are showing their resiliency,” said Jack Kleinhenz, chief economist at the National Retail Federation. “The expected cut is not so much from a domestic standpoint but from a global standpoint, in support of the global expansion, which then has feedback effects into the United States.”

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