In a little more than a week, Federal Reserve policymakers are poised to lower benchmark interest rates for the first time since the start of the COVID-19 pandemic. Ahead of that decision, mortgage rates continued to decline, although a surge of borrowers has yet to appear.

At HousingWire‘s Mortgage Rates Center on Tuesday, the average 30-year conforming loan rate was 6.47%, down 13 basis points (bps) from one week ago. The average 15-year conforming loan rate dropped 11 bps to 6.12% during the same period.

The key question heading into the Sept. 17-18 meeting of the Federal Open Market Committee (FOMC) is not whether the federal funds rate will be lowered but how large the cut will be. The CME Group‘s FedWatch tool on Tuesday showed that 71% of interest rate traders were anticipating a cut of 25 bps, with 29% estimating a cut of 50 bps. Benchmark rates have been at a range of 5.25% to 5.5% since July 2023.

Mortgage originators told HousingWire last week that they believed a 25-bps decrease was already priced into the market. The August jobs report showed further cooling of the U.S. economy, but economists at Nationwide and the Mortgage Bankers Association believed it wasn’t enough to convince Fed officials to make a larger cut.

HousingWire Lead Analyst Logan Mohtashami wrote last week that benchmark rates would still be in restrictive policy territory even if the Fed had cut them three times this year. In a separate report, Mohtashami noted that mortgage rates could slide to 5.75% or lower if there is further weakening of labor market data and a stock market sell-off that results in more capital being placed in bonds.

“We are far from any natural pivot in my mind — all we have done is start the discussion about putting the rate-cut cycle into the neutral stance,” Mohtashami wrote. “I say this because if the Fed thought the economy was breaking, they would leave hints about what accommodative rate policy would look like. Today, we stand with no rate cuts, but the first will come this month.”

Consumer Price Index (CPI) data for August is set to be released Wednesday. But inflation has been less burdensome recently for potential monetary policy decisions in comparison to fewer job additions and a steadily rising unemployment rate. Afifa Saburi, a capital markets analyst at Veterans United Home Loans, said the CPI report is unlikely to have much impact on the mortgage market.

“It’s unlikely for this print to move market expectations back to a 50bp cut for September,” Saburi said in a statement. “As a result, rates are likely to stay mostly flat this week, which means they will remain at some of the lowest levels of the year. Any meaningful movement in rates, in either direction, will come next week from the Fed’s announcement and revised dot plot.” 

Data released Tuesday by mortgage technology firm Optimal Blue showed that lower rates are creating more refinance candidates. Rate locks for rate-and-term refis jumped by 109% month over month and by 300% year over year in August. And refis of all types accounted for 26% of locks last month, the highest share since March 2022, when the Fed began raising rates to combat 40-year-high inflation.

But lower rates are not sparking more home purchase activity. Locks for purchase loans last month were down 16% year over year — and were 45% lower than the pre-pandemic level of August 2019 — due to “continued affordability and inventory challenges,” according to Optimal Blue.

Along with the well-documented lock-in effect that is keeping many Americans from selling their homes, older homeowners who greatly prefer to age in place are also contributing to inventory shortages.