Fed Cuts Rates in Third-Consecutive Meeting While Existing Sales Rise

(The Fannie Mae Economic & Housing Weekly Note will not be published for the next two weeks.)

Key Takeaways:

• The Federal Open Market Committee (FOMC) cut the federal funds rate by 25 basis points to a target range of 4.25-4.5 percent at its December 17-18 meeting. There was one dissenting vote. The updated Summary of Economic Projections (SEP) now shows the median participant expects 50 basis points worth of rate cuts in 2025, as opposed to 100 basis points worth of cuts in the September SEP. The committee has also revised upward their expectations for core inflation over the next two years.
• Gross domestic product (GDP), adjusted for inflation, grew at a 3.1 percent annualized rate in Q3 2024, an upgrade of three-tenths compared to the prior estimate, according to the third and final estimate from the Bureau of Economic Analysis (BEA). The upgrade was primarily due to stronger consumption (3.7 percent annualized vs. 3.5 percent previously) and exports. Gross domestic income (GDI), a theoretically equivalent measure to GDP that can differ due to measurement error, posted a somewhat softer 2.1 percent annualized gain in the third quarter.
• Personal income, adjusted for inflation, increased 0.2 percent in November, according to the BEA. Real disposable personal income was also up 0.2 percent. Real personal consumption expenditures increased 0.3 percent over the month due to a strong 0.7 percent gain in spending on goods. The personal consumption expenditures (PCE) price index increased 0.1 percent over the month and was up 2.4 percent compared to a year prior. Excluding food and energy, core PCE prices also increased 0.1 percent over the month and rose 2.8 percent compared to a year prior.
• Retail sales and food services increased 0.7 percent in November, according to the Census Bureau. Part of the gain was due to a 2.6 percent jump in motor vehicle and parts dealer sales and a 1.8 percent increase in nonstore retailers, which primarily represents online sales. Control group retail sales (excluding food service, auto, building supplies, and gas station sales) increased 0.4 percent, more than reversing the 0.1 percent decline the month prior.
• Existing home sales rose 4.8 percent to a seasonally adjusted annualized rate (SAAR) of 4.15 million, the strongest sales pace since March, according to the National Association of Realtors. The number of homes available for sale declined 2.9 percent to 1.33 million. Combined with the stronger sales pace, the supply of homes declined four-tenths to 3.8 months, the lowest level since April.
• Housing starts declined 1.8 percent to a SAAR of 1.29 million in November, according to the Census Bureau. Single-family starts rose 6.4 percent to a SAAR of 1.01 million, reversing most of last month’s decline that was due primarily to hurricane-related disruptions. Single-family permits were essentially flat at 972,000. The volatile multifamily starts series dropped 23.2 percent to a SAAR of 278,000, while multifamily permits rose 19.0 percent to a SAAR of 533,000.
• The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index was unchanged at 46 in December. The index for single-family sales in the present was unchanged at 48, while the index for sales in the next six months rose 3 points to 66, a more than 2.5-year high. The index for the traffic of prospective buyers declined 1 point to 31.

Forecast Impact:

The Fed’s rate cut was in line with market and our own expectations. The updated SEP, which shows fewer rate cuts over the next two years compared to the September SEP, could potentially move mortgage rates higher given the recent upward movement in the 10-year Treasury note rate. While core PCE inflation came in cooler in November, smoothing through some of the recent volatility, the three-month annualized rate of core inflation remains elevated at 2.5 percent, supporting our expectation for a pause in rate cuts early in 2025.

The upgraded consumption growth in the third quarter presents a bit of upside risk to our fourth-quarter forecast in the same category, though we had already penciled in a robust 3.0 percent annualized growth rate. The gain in control group retail sales, which feed directly into the BEA’s estimates for consumption, lend support to our forecast for ongoing strong consumption growth in Q4, as does the gain in real monthly consumption in the monthly PCE report.

The rise in existing home sales likely reflects, in part, lower mortgage rates toward the end of September on properties that took longer to close, especially in Florida and nearby states where hurricanes could have slowed the closing process. Still, some of the higher sales pace (albeit, still very suppressed by historical standards) could be sustained into December and next year even amid higher rates given recent improvements in mortgage application data. On the new construction side, the gain in single-family starts recovered most of the decline in October that was due to hurricane disruptions. The fourth quarter is currently tracking in line with our forecast. Single-family permits have been essentially flat since August, but still suggest a strong pace of building into 2025, especially when combined with a more than 2.5-year high in builder sentiment for sales over the next six months.

Nathaniel Drake
Economic and Strategic Research Group
December 20, 2024

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