Fed's Goolsbee: Another 125 bps by End-2025
Friday, Nov 15, 2024 2:41 pm ET
2min read Economist Austan Goolsbee recently shared his projections for the Federal Reserve's interest rate cuts, suggesting another 125 basis points (bps) by the end of 2025. This shift in monetary policy could have significant implications for bond yields, housing demand, and the broader economy. Let's delve into the potential impacts and investment opportunities arising from this development.
The Fed's rate cuts are expected to influence bond yields and prices, with lower yields leading to higher bond prices. This dynamic could benefit bond investors, particularly those holding existing bonds, as they will experience capital gains. However, new bond purchases will yield lower income, necessitating a rebalancing of portfolios. Investors may choose to allocate more to bonds to capture capital gains while considering the reduced income.
The Fed's rate cut projections could also impact the demand for and supply of bonds, potentially tightening bond market liquidity. As interest rates decrease, demand for bonds typically increases, pushing prices up. However, a decrease in the supply of bonds, due to investors holding onto existing bonds, could lead to a tightening of liquidity, making it more challenging for investors to buy and sell bonds. Additionally, a decrease in the yield curve could make it more difficult for investors to find attractive investment opportunities in the bond market.
The Fed's rate cut projections could influence the performance of different bond sectors, such as government, corporate, and mortgage-backed securities. Government bonds may see increased demand, pushing prices up and yields down, as investors seek safer havens. Corporate bonds, particularly those with higher credit ratings, could benefit from lower borrowing costs, potentially leading to improved credit quality and reduced default risks. However, mortgage-backed securities might face headwinds due to lower demand for refinancing and potential increases in prepayment speeds, which could negatively impact their performance.
The Fed's rate cuts could boost housing demand and affordability by reducing mortgage costs, making home purchases more affordable. According to S&P Global Ratings, housing starts are projected to rise from 1.35 million in 2024 to 1.4 million in 2025, signaling increased demand. However, persistent supply constraints may limit the extent to which affordability improves.
The Fed's rate cuts, totaling 175 bps by end-2025, will likely boost mortgage refinancing activity. As of Q4 2024, the 10-year Treasury yield is projected to be 3.4%, down from 4.1% in 2023. This decline, coupled with lower mortgage rates, will make refinancing more attractive for homeowners. However, the impact may be tempered by the fact that mortgage rates have already fallen significantly since their peak in 2022, reducing the incentive for homeowners to refinance.
The Fed's policy changes could stimulate housing supply and construction activity by making mortgages more affordable, encouraging homebuyers to enter the market, and boosting demand for new housing. This increased demand could incentivize builders to construct more homes, addressing the current housing shortage. Additionally, lower interest rates reduce borrowing costs for builders, making it more feasible for them to undertake new projects. However, the impact on housing supply and construction activity will depend on various factors, such as land availability, labor market dynamics, and regulatory environments.
The Fed's projected rate cuts could have significant implications for mortgage-backed securities (MBS) and the broader bond market. Lower interest rates typically lead to higher bond prices, as investors demand lower-yielding securities. This could result in a rally in MBS and other fixed-income securities. However, the Fed's shift in focus from inflation to employment suggests a potential slowdown in economic growth, which could impact the demand for MBS and other bonds. Additionally, the Fed's balance sheet reduction could lead to higher long-term interest rates, offsetting the impact of rate cuts on bond prices. Therefore, the net impact on MBS and the broader bond market remains uncertain.
In conclusion, the Fed's rate cut projections, as outlined by Austan Goolsbee, could have far-reaching implications for bond yields, housing demand, and the broader economy. Investors should carefully consider the potential impacts on their portfolios and allocate accordingly. As always, it is essential to maintain a balanced portfolio, combining growth and value stocks, and to prioritize risk management, informed market predictions, and thoughtful asset allocation. By doing so, investors can position themselves to capitalize on the opportunities presented by the Fed's rate cut projections while mitigating potential risks.
The Fed's rate cuts are expected to influence bond yields and prices, with lower yields leading to higher bond prices. This dynamic could benefit bond investors, particularly those holding existing bonds, as they will experience capital gains. However, new bond purchases will yield lower income, necessitating a rebalancing of portfolios. Investors may choose to allocate more to bonds to capture capital gains while considering the reduced income.
The Fed's rate cut projections could also impact the demand for and supply of bonds, potentially tightening bond market liquidity. As interest rates decrease, demand for bonds typically increases, pushing prices up. However, a decrease in the supply of bonds, due to investors holding onto existing bonds, could lead to a tightening of liquidity, making it more challenging for investors to buy and sell bonds. Additionally, a decrease in the yield curve could make it more difficult for investors to find attractive investment opportunities in the bond market.
The Fed's rate cut projections could influence the performance of different bond sectors, such as government, corporate, and mortgage-backed securities. Government bonds may see increased demand, pushing prices up and yields down, as investors seek safer havens. Corporate bonds, particularly those with higher credit ratings, could benefit from lower borrowing costs, potentially leading to improved credit quality and reduced default risks. However, mortgage-backed securities might face headwinds due to lower demand for refinancing and potential increases in prepayment speeds, which could negatively impact their performance.
The Fed's rate cuts could boost housing demand and affordability by reducing mortgage costs, making home purchases more affordable. According to S&P Global Ratings, housing starts are projected to rise from 1.35 million in 2024 to 1.4 million in 2025, signaling increased demand. However, persistent supply constraints may limit the extent to which affordability improves.
The Fed's rate cuts, totaling 175 bps by end-2025, will likely boost mortgage refinancing activity. As of Q4 2024, the 10-year Treasury yield is projected to be 3.4%, down from 4.1% in 2023. This decline, coupled with lower mortgage rates, will make refinancing more attractive for homeowners. However, the impact may be tempered by the fact that mortgage rates have already fallen significantly since their peak in 2022, reducing the incentive for homeowners to refinance.
The Fed's policy changes could stimulate housing supply and construction activity by making mortgages more affordable, encouraging homebuyers to enter the market, and boosting demand for new housing. This increased demand could incentivize builders to construct more homes, addressing the current housing shortage. Additionally, lower interest rates reduce borrowing costs for builders, making it more feasible for them to undertake new projects. However, the impact on housing supply and construction activity will depend on various factors, such as land availability, labor market dynamics, and regulatory environments.
The Fed's projected rate cuts could have significant implications for mortgage-backed securities (MBS) and the broader bond market. Lower interest rates typically lead to higher bond prices, as investors demand lower-yielding securities. This could result in a rally in MBS and other fixed-income securities. However, the Fed's shift in focus from inflation to employment suggests a potential slowdown in economic growth, which could impact the demand for MBS and other bonds. Additionally, the Fed's balance sheet reduction could lead to higher long-term interest rates, offsetting the impact of rate cuts on bond prices. Therefore, the net impact on MBS and the broader bond market remains uncertain.
In conclusion, the Fed's rate cut projections, as outlined by Austan Goolsbee, could have far-reaching implications for bond yields, housing demand, and the broader economy. Investors should carefully consider the potential impacts on their portfolios and allocate accordingly. As always, it is essential to maintain a balanced portfolio, combining growth and value stocks, and to prioritize risk management, informed market predictions, and thoughtful asset allocation. By doing so, investors can position themselves to capitalize on the opportunities presented by the Fed's rate cut projections while mitigating potential risks.
Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.