For the second time since July 2019, the Federal Reserve has cut the interest rate. The cut this past Wednesday was by a quarter of a percentage point.
Why Interest Rates Were Cut Again and the US Economic Outlook
As previously reported, the Fed’s decision-makers have been somewhat split on policies regarding interest rate cuts. In fact, 3 members of the Fed’s rate-setting committee abstained from voting- the highest “no votes” in one meeting since 2016. And this latest cut once again comes at a time when the US economy is going strong and the unemployment rate is low. And, with inflation remaining below the Fed’s annual target of 2%, this allows officials to make a cut without having to worry about extreme increases in prices. However, Jerome H. Powell, the Fed Chair, said (referring to the positive economic outlook):
There are risks to this positive outlook.
Essentially, experts are unclear on the actual economic outlook for the nation as 2020 approaches. And, according to Powell, if the economy were to weaken, then more interest rate cuts could be needed. Powell said that the Fed is keeping a close watch over the economic situation in the US and will stop implementing interest rate cuts when the committee thinks they have done enough to sustain expansion:
There may come a time when the economy weakens and we would then have to cut more aggressively. We don’t know. We’re going to be watching things carefully, the incoming data and the evolving situation.
Even though interest rate cuts may continue into the next year, none of the officials believe it will fall below 1.5-1.75% before 2022. Currently, the interest rate stands at a range of 1.75 to 2%.
Will There Be Another Interest Rate Cut Before the End of 2019?
While some of the Fed officials believe that the interest rate will stay the same until the end of the year, 7 out of 17 actually expect there to be another interest rate cut before 2020. This is a significant contrast to 2018 when rates were raised 4 times.
How Will This Affect Real Estate Investors?
Mortgage rates have already been dropping in the US and, because they are directly affected by the Fed interest rate, this latest cut is likely to cause them to drop even more. Last week, the mortgage rate for a 30-year fixed-rate mortgage loan was 3.65%. This was already a drop from the 4.60% rate the week before. Lower mortgage rates give real estate investors the opportunity to either refinance or buy more investment properties. If you’re a first-time real estate investor, you may be able to finally afford to enter the real estate market. According to a study by LendingTree, a property buyer can afford a property worth $186,282 with a 5% rate and a $1000 monthly payment. Essentially, a cut in interest rates causes mortgage rates to drop, making buying an investment property more affordable. We have already seen evidence of this since the last cut as mortgage applications have been on the rise.
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