How the Fed rate cut will affect mortgage rates, Long Island's housing market

Long Islanders and businesses borrowing money will benefit from the Federal Reserve’s decision this week to lower its benchmark interest rate, economic experts said.

But they said the Fed’s cut will deliver limited relief to Long Island homebuyers seeking out mortgages.

The Fed lowered the key rate by a quarter point on Wednesday to between 4% and 4.25%.

That decision will help borrowers taking on short-term loans, but the Fed has less influence over long-term debt, such as 30-year mortgages, said Stephen Kates, a financial analyst at Bankrate. A new report Thursday from Mortgage News Daily also showed mortgage rates may not continue their decline that started earlier this summer. The average 30-year fixed mortgage rate hasn't dipped below 6% since September 2022.

Newsday spoke with mortgage and economic experts about what the Fed’s decision will mean for the Long Island housing market and the broader economy.

What is the Fed’s benchmark rate?

The federal funds rate is the interest rate banks use to lend from one another overnight. The Fed’s Federal Open Market Committee sets this rate and uses it as a monetary policy tool to advance its dual mandate of maximum employment and stable prices, according to the Fed.

Essentially, the Fed wants to promote job creation and keep inflation in check, said Steven Kent, chief economist for the Long Island Association, the Melville-based business group.

Why did the Fed lower its benchmark rate?

The Fed has been mostly focused on inflation over the past few years but unemployment claims had been rising in recent weeks, raising concerns about weakness in the U.S. economy.

“With downside risks to employment having increased, the balance of risks have shifted,” Fed Chair Jerome Powell said in announcing the rate cut decision.

However, a Thursday report from the Labor Department showed more positive news on the job market. New weekly jobless claims fell by 33,000 to 231,000 for the week ended Saturday.

How did mortgage rates react?

The average 30-year fixed mortgage rate has been falling in recent weeks, partly because of anticipation of a Fed rate cut. The average fell to 6.26% this week, according to a report released Thursday by mortgage giant Freddie Mac. That’s down significantly from 6.75% in mid-July.

But the decline in the mortgage rate started weeks before the Fed’s rate decision, and the Freddie Mac report released Thursday measures lenders’ pricing for loans offered through Wednesday — before the Fed made its decision.

Another gauge — an average rate released by Mortgage News Daily that’s closely watched by mortgage brokers — showed rates actually moved higher after the Fed’s rate decision, to 6.37% as of Thursday.

"Rates have actually, in some cases, bumped up a little bit since the Fed's announcement," said Larry Matarasso, a senior loan officer at mortgage broker Green River Capital in Plainview.

That’s because the Fed doesn’t set mortgage rates, which more closely follow the yield on 10-year Treasury bonds. Mortgage rates are influenced by demand for government bonds as well as investors’ expectations about future inflation.

What direction will mortgage rates head next?

It’s hard to say. Generally, mortgage rates rise during periods of significant inflation and fall when there are greater fears of a recession.

Powell made clear during a news conference this week that policymakers will be monitoring economic data to determine their next steps on rates, Bankrate's Kates said. Fed policymakers signaled they expect two more quarter-point rate cuts this year and one additional quarter-point cut next year.

But homebuyers should be aware that further declines aren’t assured.

“That’s a big thing consumers need to take away — there are no guarantees,” Kates said. “If inflation were to spike, — and that’s not my prediction, but it’s possible — then that might mean there are no cuts.”

What other types of loans are affected?

The Fed more directly influences rates on short-term lending, such as credit cards, auto loans and home equity lines of credit.

“Other borrowing does follow the Fed more closely,” Kates said. “Variable rates like credit cards, home equity lines of credit, they’re going to follow quite quickly.”

How could the cut affect the broader Long Island’s economy?

When businesses can get cheaper loans, they are more likely to expand or hire or buy other companies, said Steven Kent, who's also a Molloy University economics professor.

“That should invigorate the economy a little bit,” he said.

Long Islanders paying lower interest costs also will have more money to spend at local businesses, Kent said.

What will this mean for Long Island’s housing market?

A lower mortgage rate means a more affordable monthly payment for homebuyers, but it’s unlikely to deliver much relief for buyers, Kates said.

Long Island has seen home prices rise significantly since the pandemic, and those increases have continued this year. The median home price rose to a record $875,000 in Nassau County and an all-time high of $714,000 in Suffolk County last month.

“Home prices have accelerated so fast in the last five years, that a little bit of a rate cut is not going to bring us back to the monthly payments people are remembering in 2020,” Kates said.

A key challenge on Long Island has been an inadequate supply of for-sale homes, and further declines in mortgage rates are needed to convince more homeowners to list their homes. For owners with mortgage rates below 4%, there has been little incentive to sell, Matarasso said.

How will savers be affected?

Savers who hold money in savings accounts and CDs can expect to earn less interest on their money. Banks tend to act quickly to lower those rates, said Bankrate's Kates.

“Those come down fast and go up slowly, whereas the borrowing rates go up fast and come down slowly,” he said.

By Jonathan LaMantia

jonathan.lamantia@newsday.com@jonlamantia

Jonathan LaMantia covers residential real estate and other business news on Long Island. He previously covered the business of health care for Crain's New York Business.