The Federal Reserve may reach its 2% inflation target rate by early 2025 and it is likely done with its restrictive monetary policy, Mike Fratantoni, Mortgage Bankers Association (MBA) chief economist and senior vice president, said at the Market Outlook session on Sunday at the MBA Annual Conference in Philadelphia.

Fratantoni said he did not expect the central bank would raise interest rates in November and said there was a minimal chance they would do so in December. He is also anticipating that the central bank will cut interest rates three times in 2024. 

The 10-year treasury rate, which reached a new high of 4.8% recently, is also expected to start reversing course and drop below 4% by the end of the year and into a neutral rate within the 3.5% range, Fratantoni said. That's good news for mortgage rates, which recently saw the 30-year soar to 7.57%. Fratantoni said he expected mortgage rates to begin trending down over the next two years.

"This is the bottom of the cycle," Fratantoni said.

"Our view is that the Fed's done and they're going to stick at this 5.25% to 5.5% fund rate," Fratantoni said. "This does run counter to their suggestion at their last meeting in September, where they put out projections saying median members still think one more hike, but if you listen to the speeches that they've given the last couple of weeks, even some of the more hawkish members are saying long end of the curve has increased so much that's doing our work for us and we probably don't need to hike anymore right now."

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The Fed has raised interest rates 11 times since March of last year, pushing the federal funds rate to a 22-year high of 5.25% to 5.5% in a bid to lower soaring inflation. The central bank is now in the position to reach its 2% inflation target rate without doing anything more, Fratantoni said.

The Federal Open Market Committee (FOMC) members expect the federal funds rate to begin falling in 2023 into 2025, with the central bank members looking for a median of two cuts in 2024 and additional cuts in 2025, according to Fratantoni. The expectation is that the long-term rate will probably edge down to about 2.5% to 3% in that timeframe. Although the market should be confident about the Fed's rate expectation, the reality is that the central bank is in a position where, even if they do nothing, inflation will fall.

"The Fed is already at a place where if they do nothing and inflation holds or falls farther from here, they are going to be slowing the rate of growth, and the cumulative impact of the rate increase they have already made is not fully felt yet," Fratantoni said.

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The U.S. government's fiscal policy has probably weighed heaviest on mortgage rates over the last two months, Fratantoni said. That's because the income the government is taking in has dropped, and outlays are up – in other words, the federal government is taking in less and spending more. Moreover, the deficit is up by about 60% compared to last year, and the government is paying roughly 30% more on interest now than last year.

"To put that in context, we spend about $800 billion on defense," Fratantoni said. "We're now spending $700 billion on interest. Financial markets are reacting to these kinds of numbers as well as to the challenges our government's having and even reaching budget decisions."

Another debt limit impasse similar to what was seen earlier this year could again threaten the U.S. government's ability to service its outstanding debt and put the country at risk of default and downgrades. Fitch Ratings downgraded U.S. debt from AAA to AA+ on August 1, citing rising deficits, a broken budgeting process, and political brinkmanship — similar to Standard & Poor's downgrade after the 2011 debt limit episode. Moody's Investors Service also cautioned recently that a prolonged U.S. government shutdown could trigger a downgrade.

"So the main three agencies, again, that's a real risk," Fratantoni said. "I think that's going to be putting pressure on mortgage rates for some time."

If need to take out a mortgage even as rates remain high, comparing multiple options can help you save money on your monthly payments. Contact Credible to speak to a home loan expert and get your questions answered. 

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