Anyone working in the industry probably saw this coming. But those who didn’t realize it might find themselves confused.
Yesterday, the Fed finally decided to cut the federal funds rate, but mortgage rates rose. Why does this seem to happen all the time?
Shouldn’t good news on interest rates push interest rates down across the board? That makes perfect sense until you dig into the details.
There are two main reasons why mortgage rates often defy the Fed’s own moves.
The first reason is that Fed policy is often fairly public and not surprising, and the second reason is that the data is usually already ready.
The Fed simply follows economic data.
First and foremost, the Fed makes monetary policy decisions (up, down, nothing) based on the economic data available to it.
So the FOMC statement and accompanying interest rate decision don’t come as a huge surprise overall.
There was more uncertainty than usual yesterday, with the possibility of a 25bp and then 50bp cut.
Federal Reserve Bank She chose to go with a 50 basis point cut.which was preferred with a probability of ~60% for each CME Fed Monitoring.
In other words, the Fed did what the market expected, as it usually does. The reason the Fed does what the market expects is that it bases its decisions on publicly available data.
In fact, the data is already somewhat out of date by the time the Fed announces its decision, which removes much of the element of surprise.
However, what could move the bond market after the FOMC decision on interest rates is the press conference with Federal Reserve Chairman Jerome Powell.
He explained that they took the step of cutting interest rates by 50 basis points because they had been patiently waiting for inflation to decline, and were now comfortable taking a “strong step.”
A larger reduction would (hopefully) allow them to avoid a large increase in unemployment while preventing a return to high inflation.
But he added that we should not expect a 50 basis point rate cut to become the new normal. Decisions will be made at each meeting separately.
So there are no real surprises here and not enough new information to keep mortgage rates down.
Mortgage lenders have already cut interest rates significantly ahead of the Fed’s rate decision.
The other relevant part here is that mortgage lenders were already aggressively cutting mortgage rates ahead of the Fed meeting.
If you look at the 30-year fixed yield, it has already fallen about 150 basis points (1.50%) since the end of April.
In other words, bonds and mortgage-backed securities (MBS) have been seeing big moves based on data and the expected shift from the Fed for months.
Much, if not nearly all, of the price improvement was priced in ahead of Fed Day. It’s a kind of “news selling.”
You know something is going to happen, so you buy bonds or mortgage-backed securities, and once the news actually comes out, it might be a good time to sell a few.
In this case, it’s just an expected rebound in the opposite direction, as everyone digests the widely anticipated Fed decision.
In other words, mortgage lenders tend to price interest rates defensively ahead of a FOMC rate decision, so there is often a slight increase in rates after a rate hike.
Just keep in mind that this is just one day, and mortgage rates could evolve into a longer-term trajectory based on what happens with the Fed and fundamental economic data.
But the best way to track mortgage rates is by watching the 10-year bond yield and/or mortgage-backed securities prices.
Since yesterday, the yield on the 10-year note has risen about 10 basis points, and prices of mortgage-backed securities have fallen slightly.
There wasn’t much of a move, but it was probably a disappointment to those who thought mortgage rates would fall further after the Fed cut interest rates.
Mortgage Rates Tend to Challenge Fed
September 18, 2024: Lower interest rates and higher mortgage rates
July 26, 2023: Rising interest rates and falling mortgage rates
May 3, 2023: Rising interest rates and falling mortgage rates
March 22, 2023: Rising interest rates and falling mortgage rates
February 1, 2023: Rising interest rates and falling mortgage rates
December 14, 2022: Rising interest rates and falling mortgage rates
November 2, 2022: Higher interest rates, higher mortgage rates
September 21, 2022: Rising interest rates and falling mortgage rates
July 27, 2022: Rising interest rates and falling mortgage rates
June 15, 2022: Rising interest rates and falling mortgage rates
May 4, 2022: Rising interest rates and falling mortgage rates
March 16, 2022: Higher interest rates, higher mortgage rates
I was curious to see what typically happens with mortgage rates on Fed decision day, so I looked at the past 12 decisions and used them Motor nerve data For the movement of mortgage rates on the relevant days.
I’ve listed 11 rate hikes since March 2022 and the pivot to a cut yesterday. Unsurprisingly, in my opinion, mortgage rates tend to defy the Fed more often than not.
In other words, when the Fed raises interest rates, mortgage rates often fall. When the Fed lowers interest rates, mortgage rates tend to rise.
I’ll need more data on the latter piece as they continue to make the expected cuts. But I wouldn’t be surprised to see this trend continue.
Just note that mortgage rate movements after a Fed rate decision are not often significant. Over time, things can change more dramatically.
For example, although lenders often cut interest rates on the day the Fed raises rates, the longer-term trend for mortgage rates has been significantly higher.
Now we may see the opposite. With the Fed expected to make further cuts, lenders may gradually lower interest rates over time.
But again, it’s not the Fed, it’s the fundamental data and the direction of the economy.
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