Interest Rates Are Already Falling as Wall Street Cheers Fed News

Consumer borrowing costs are already starting to fall following the Federal Reserve's rosy outlook Wednesday on the U.S. economy.

Though the Fed didn't actually cut its benchmark interest rate, Wall Street is already trading bonds as if rate cuts are on their way and that's driving borrowing costs down for consumers.

The 10-year Treasury yield, which serves as a baseline interest rate for U.S. financial markets and consumer loans, slipped below 4% on Thursday. That portends relief for consumers who've been paying steep rates on mortgages, auto loans and credit card rates.

Mortgage rates are closely tied to the 10-year Treasury and declining yields have already brought relief to anyone looking to purchase a new home, with the average 30-year mortgage rate dipping below 7% for the first time since summer. It had been closer to 8%.

The yield on the benchmark 10-Year U.S. Treasury had soared above 5% in October, a high not seen since 2007. But it fell to about 3.9% on Thursday following a signal from the Federal Reserve on Wednesday that interest rate cuts are likely on the way next year.

Stocks surged on the news with the Dow Jones Industrial Average setting a new record on Wednesday and moving even higher on Thursday. The Dow closed up 158 points, or 0.43%, to 37,248. The S&P 500 was up 0.26% and the Nasdaq Composite was up 0.19%.

The Fed announced it would hold its key rate at 5.25% to 5.5% where it has been since July. The central bank's rate-setting Federal Open Market Committee also released its so-called dot plot revealing that policymakers believe rates could drop next year to between 4.25% and 4.75%.

The dot plot showed the Fed and Wall Street are finally coming together on their interest rate forecast. They had been far apart with the market calling for rate cuts and the Fed holding firm.

"The FOMC Dot Plot matches Comerica’s end-of-year economic forecast in anticipating three quarters of a percent in monetary policy rate reductions next year," Bill Adams, chief economist for Comerica Bank in Dallas, in an emailed commentary. 

His forecast also calls for a slowing economy and a modest rise in unemployment – the kind of slowing the Fed has been trying to achieve to bring down inflation.