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What does Fed rate cut mean for Virginia?

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Print this page By Kate Andrews | .(JavaScript must be enabled to view this email address)
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Federal Reserve Bank of Richmond

For the first time in 11 years, the Federal Reserve has cut interest rates, a preemptive move amid a global economic slowdown and tensions over U.S. trade with China, although the central bank’s assessment of the U.S. economy is generally positive.

With the reduction of rates from 2.5% to 2.25%, what does the Fed’s decision mean for Virginia?

Probably not much, particularly in terms of home sales, says Vinod Agarwal, deputy director of Old Dominion University’s Dragas Center for Economic Analysis and Policy. At an average of 3.8%, mortgage rates are already very low in Virginia and the Fed’s cut will likely have little influence on long-term loan interest rates, Agarwal adds, those being far more affected by the U.S. 10-Year Treasury Note rate, listed this afternoon around 2%.

In Virginia, home sales decreased 6% between June 2018 and June 2019, according to the most recent Virginia Realtors home sales report, with Hampton Roads and Northern Virginia driving the slowdown. Demand remains high, though.

“Mortgage rates have remained consistently low for some time now, which is one factor that has led to brisk home sales in our region,” says Ryan T. Conrad, CEO of the Northern Virginia Association of Realtors. “While a potential reduction in the Fed rate could push mortgage rates slightly lower, it is hard to imagine that it would have a significant impact on our already robust housing market. Given our current limited supply of available homes for sale, coupled with high demand, a rate change isn’t likely to alter consumer behavior.”

The story is similar in Central Virginia, where “the challenge is inventory,” says Laura Lafayette, CEO of the Richmond Association of Realtors. Especially in neighborhoods with homes costing less than $250,000, sellers commonly receive multiple offers and get 99% of their asking price, she adds. “When you have a lack of supply of listings, you wonder what a quarter percentage is going to do.”

Nonetheless, the Fed decrease may provide a psychological boost for first-time homebuyers who need just a little nudge to enter the market, Lafayette says. The cut also could be good news for people with credit card debt and for businesses, which may be more inclined to create jobs or make other investments, Agarwal says.   

The U.S. Bureau of Labor Statistics reported healthy job growth in Virginia, which added more than 31,700 new jobs between June 2018 and June 2019, with many in professional and technical services, leisure and hospitality, health and social assistance and manufacturing. 

Francis E. Warnock, professor of business administration at the University of Virginia’s Darden School of Business, suggests that the short-term effects of the rate cut could include slightly faster economic growth, as well as the possibility of a weaker dollar and higher inflation rates. “The rate cut is largely because the Fed is worried about future shocks such as trade wars negatively affecting sentiment and thus companies’ decisions to expand,” he says.

The last time the Fed cut rates was in December 2008, when the central bank lowered its benchmark rate virtually to zero in response to the burgeoning economic crisis. Six former leaders of the Federal Reserve, including former chairs Alan Greenspan and Janet Yellen, spoke in favor of a quarter-point cut this week, although not further reductions, according to a Washington Post report. Agarwal said that he would be watching inflation rates and wage growth for signs that the Fed may make another rate cut later this year.

Traders appeared to be more confident after Wednesday’s announcement that the Fed will cut rates again in September, as futures trading indicated a 79% chance of another quarter-point reduction, according to The Wall Street Journal.





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