The reason why mortgage rates rise after the Federal Reserve interest rate cut

Well, it happened again. The Federal Reserve announced another rate cut and mortgage interest rates rose.

In fact, the 30-year fixed now starts at 7 instead of 6 for most loan scenarios. What’s going on here?

While it seems to defy logic, it is a very common occurrence. It actually happened in September as well.

This would make it abundantly clear that the Fed does not set mortgage interest rates.

In other words, if they lower, mortgage rates will not decrease as well. If they go up, mortgage rates don’t go up either. But indirect effects are certainly possible.

What does a Fed rate cut mean for mortgage rates?

Yesterday, the Fed Announce It is the third cut in interest rates since they turned from hikes about a year ago.

They cut the federal funds rate (FFR) by another 25 basis points (0.25%) to meet employment and inflation goals, known as the dual mandate.

In short, inflation is at risk of rising again, but unemployment is also at risk of rising. So they felt another cut was warranted.

On a normal day, this would have zero impact on mortgage rates, which are long-term rates such as 30-year fixed rates.

The Fed’s policy involves short-term interest rates, where FFR is the overnight lending rate that banks charge each other when they need to borrow.

So the key here is that the FFR and the 30-year fixed are very different in terms of maturity, and so there is often little correlation.

However, the Federal Reserve does more than just lower or raise the fiscal interest rate. It also communicates long-term policy goals and produces a dot plot that identifies future cuts or rises in interest rates.

This scoring chart is released quarterly at their March, June, September and December meetings Summary of economic forecasts.

It can be more relevant to mortgage rates because it provides a longer expected path for monetary policy spanning several years.

The latest events show that FOMC participants see FFR in 2025, 2026, 2027 and beyond.

In other words, a longer-term view is more relevant to long-term mortgage rates.

What ultimately led to yesterday’s mortgage interest rates was a revised dot plot that was more hawkish in tone.

Simply put, there are fewer future cuts in interest rates. Higher for longer may be here to stay.

Why is the Fed so slow to cut interest rates?

It boils down to economic data, which was showing signs of slowing for most of last year before picking up recently.

“The average September forecast for total personal consumption expenditures inflation is 2.4 percent this year and 2.5 percent next year, somewhat higher than expected in September.” Powell said in prepared remarks.

“After that, the average forecast drops to our target of 2 percent.”

The fear now is that inflation will return, which will force the Fed to at least end its rate-cutting cycle early.

Or, at worst, it might force the Fed to raise interest rates again, although Powell has indicated that is unlikely in 2025.

Fed Chairman Jerome Powell noted in his press conference yesterday that policy participants had indicated “more uncertainty about inflation” and said: “When the path is uncertain you go a little slower.”

In other words, the Fed is not sure additional interest rate cuts are necessary, especially if they have an inflationary effect.

The latest dot plot supports this, suggesting that interest rates are expected to be cut by just 1-2 in 2025, down from 3-4 previously.

This is what prompted mortgage interest rates to rise yesterday. Long-term expectations, not the interest rate cut itself.

But the Fed acknowledges there is a lot of uncertainty

Here’s the thing though. The Fed still expects inflation to move toward its 2% target, as Powell said in his quote above.

Getting there can be a bumpy road, as a straight line is rarely the path to anything, including mortgage rates.

On top of the uncertainty is the incoming administration, where Trump’s tax cuts and proposed tariffs are seen as inflationary.

But again, it’s unclear what will actually happen, although Powell acknowledged that they expect “big policy changes.”

However, we don’t know how things will actually go. Could it be inflationary, surely? It could be a lot less impactful than some expect, certainly.

Could unemployment jump in 2025 while the economy falls into recession? Sure!

Ultimately, we won’t know until Trump takes office and begins his second term.

This alone may be why the Fed and bond traders are so defensive, with the 10-year yield rising by about 20 basis points. In the past two days.

The Fed’s acknowledgment of this uncertainty yesterday only made matters worse.

Remember, you can track mortgage rates by looking at the 10-year yield trend.

When they rise, mortgage rates tend to rise, and vice versa. This explains why the 30-year fixed yield jumped from 6.875% to about 7.125%.

Mortgage lenders also play defense like everyone else because they don’t want to get on the wrong side of the trade.

truly It all comes down to whoever plays defenseWhether it’s bond traders, the Fed, or banks and lenders.

You can’t really blame them, given the uncertainty surrounding inflation coupled with the arrival of a new US president.

[Mortgage Rates Tend to Fall Within 12 Weeks of a First Fed Rate Cut]

Economic conditions can change quickly

Let me add one last thing. As quickly as mortgage rates have risen over the past couple of days, they could reverse course, too.

If it turns out that inflation does not rise again, and/or Trump does not implement all of these proposed policies, mortgage rates could fall again.

The same applies to unemployment. If claims and job losses continue to rise, as they have before, the Fed will need to be more flexible again.

There could be a flight to safety as investors dump high-risk stocks and buy low-risk bonds, which helps mortgage rates.

Remember, the Fed still expects inflation to meet its target soon, despite some stumbles along the way.

If you remember inflation on its way up, there were periods when inflation looked weak, before it got worse.

Now, on the way down, there may be similar periods where, even though inflation is slowing, there are head spins and bad months of data.

But if you zoom out, it may be more clear that mortgage rates could continue to decline from 7-8% levels.

Unfortunately, prices always tend to take longer to fall than to rise. So patience may be the name of the game here.

I still expect mortgage interest rates to resume their downward path through 2025, with 30-year fixed rates remaining at the top 5 possible levels.

Read on: Mortgage rate forecasts 2025