By Timothy C. Murray

Download the PDF

Will Fed rate cuts translate into a strong U.S. economy?

Investors may need to temper their expectations for the Fed to boost U.S. growth in 2025.

November 2024, From the Field -

Key Insights

Many investors wonder whether rate cuts by the U.S. Federal Reserve will boost growth in 2025. So far, the impact of the Fed’s first cut has been muted.
Mortgage rates will need to fall further to boost U.S. housing activity. So investors may need to temper their expectations for the impact of Fed rate cuts.

The U.S. economy appears to have avoided a recession despite one of the sharpest rate hiking cycles ever by the Federal Reserve. Now investors are wondering how strong economic growth will be in 2025.

Thus far, the rebound has been slow and modest, with notable weakness in the manufacturing sector. The Institute for Supply Management’s index of manufacturing conditions remained in contractionary territory at 47.2 as of the end of September.

As a result, company earnings have been broadly disappointing so far in 2024, with the notable exception of companies benefiting from spending on infrastructure for artificial intelligence applications.

The housing market will be important

One reason for optimism that the pace of growth will quicken in 2025 is the expectation that interest rate cuts by the Fed will drive economic activity higher as falling interest costs boost spending by U.S. consumers.

However, there has only been minimal improvement in interest costs for U.S. consumers thus far. While interest rates on credit cards and new car loans have fallen, they are only about 50 basis points (a half of a percentage point) below their peak levels (Figure 1).

Consumer loan rates remain elevated

(Fig. 1) U.S. consumer loan rate proxies

Line chart showing changes in the prime rate, new car loan rates, and mortgage rates since 2019.

January 1, 2019, to October 22, 2024.
Source: Bloomberg Finance L.P.

More Fed cuts appear likely, so further relief should be on the way. But it will take some time, and the ultimate magnitude of those cuts is still very much in question.

Meanwhile, rates on fixed rate mortgages are about 135 basis points below their peaks. Mortgage rates are perhaps the most important rates to monitor because the housing market has such a heavy impact on U.S. economic activity.

But the current 30-year fixed mortgage rate, 6.4% as of October 22, is still well above rates on most existing mortgages, currently 3.9% on a weighted average basis (Figure 2). This means that many homeowners are unwilling to sell because they would have to pay a much higher mortgage rate to buy another home.

New mortgage rates are still well above those on outstanding mortgages

(Fig. 2) Current mortgage rate vs. weighted average existing rate

Line chart showing that current rates for 30-year fixed mortgages are still considerably higher than the weighted average rate on existing home loans.

January 1990 to October 2024. Current mortgage rate is as of 10/22/24. Weighted average rate onexisting mortgages is as of 6/30/24.
Sources: U.S. Bureau of Economic Analysis, Federal Home Loan Mortgage Corporation/Haver Analytics.

This raises the question of how much lower mortgage rates will need to go in order to have a significant impact on the housing market.

How much lower do rates need to go?

Data from the Federal Housing Finance Agency can help answer this question. Unfortunately, that answer is not very encouraging.

The data suggest it would take a substantial further decline in mortgage rates to make selling financially palatable to most homeowners. As of June 30, only 24.5% of outstanding mortgage loans had rates above 5%, and almost 60% had rates below 4% (Figure 3).

Most outstanding U.S. mortgages are below 4%

(Fig. 3) Distribution of U.S. mortgages by rate (based on the number of loans)

Area chart showing that a majority of existing home mortgages still have interest rates below 4%.

First quarter 2013 to second quarter 2024.
Sources: Federal Housing Finance Agency/Haver Analytics.

Conclusion

The bottom line is that the impact of Fed cuts is likely to be much more muted than normal given the limited effect they could have on housing activity.

This doesn’t mean Fed cuts will have no impact at all, as rate cuts can affect a wide array of financing activity. But the housing market is typically the most direct way for lower interest rates to translate into a stronger economy. As a result, we believe investors should temper their expectations regarding the economic impact of Fed rate cuts in 2025.

Timothy C. Murray Capital Markets Strategist Multi‑Asset Division

Tim Murray is a capital market strategist in the Multi-Asset Division. Tim is a vice president of T. Rowe Price Associates, Inc.

Nov 2024 • In the Loop • Article

What Trump’s win means for policy, the economy, and markets

Extending tax cuts and an assertive approach on trade policy likely to be areas of...

By Gilad Fortgang, Blerina Uruçi, Timothy C. Murray

Oct 2024 • In the Loop • Article

Three policy developments to watch after U.S. election

The postelection shift from campaigning to governing can create uncertainty for markets.

By Gilad Fortgang

Additional Information
CFA^® and Chartered Financial Analyst^® are registered trademarks owned by CFA Institute.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2024. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

The S&P indexes are a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”) and have been licensed for use by T. Rowe Price. Standard & Poor’s^® and S&P^® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”);Dow Jones^® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); T. Rowe Price’s Products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P indexes.

Important Information

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

Australia—Issued by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 28, Governor Phillip Tower, 1 Farrer Place, Sydney NSW 2000, Australia. For Wholesale Clients only.

Canada—Issued in Canada by T. Rowe Price (Canada), Inc. T. Rowe Price (Canada), Inc.’s investment management services are only available to Accredited Investors as defined under National Instrument 45-106. T. Rowe Price (Canada), Inc. enters into written delegation agreements with affiliates to provide investment management services.

EEA—Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.

New Zealand—Issued by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 28, Governor Phillip Tower, 1 Farrer Place, Sydney NSW 2000, Australia. No Interests are offered to the public. Accordingly, the Interests may not, directly or indirectly, be offered, sold or delivered in New Zealand, nor may any offering document or advertisement in relation to any offer of the Interests be distributed in New Zealand, other than in circumstances where there is no contravention of the Financial Markets Conduct Act 2013.

Switzerland—Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.

UK—This material is issued and approved by T. Rowe Price International Ltd, Warwick Court, 5 Paternoster Square, London EC4M 7DX which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.

USA—Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission. For Institutional Investors only.

202411-4020068

Open

Audience for the document: Share Class: Language of the document:

Open Cancel

Download

Share Class: Language of the document:

Download Cancel

Change Details

If you need to change your email address please contact us.

Subscriptions

You are ready to start subscribing.

Get started by going to our products or insights section to follow what you're interested in.

Products Insights

GIPS^® Information

T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. T. Rowe Price has been independently verified for the 27-year period ended June 30, 2023, by KPMG LLP. The verification report is available upon request. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. Verification does not provide assurance on the accuracy of any specific performance report.

TRP is a U.S. investment management firm with various investment advisers registered with the U.S. Securities and Exchange Commission, the U.K. Financial Conduct Authority, and other regulatory bodies in various countries and holds itself out as such to potential clients for GIPS purposes. TRP further defines itself under GIPS as a discretionary investment manager providing services primarily to institutional clients with regard to various mandates, which include U.S, international, and global strategies but excluding the services of the Private Asset Management group.

A complete list and description of all of the Firm's composites and/or a presentation that adheres to the GIPS® standards are available upon request. Additional information regarding the firm's policies and procedures for calculating and reporting performance results is available upon request.

Other Literature

You have successfully subscribed.

Notify me by email when

regular data and commentary is available
exceptional commentary is available

new articles become available