Why Mortgages Soared After Interest Rate Cuts

Well, it happened again. The Federal Reserve has announced another rate cut and mortgage rates are rising.

In fact, the 30-year fixed term now starts at 7 instead of 6 in most mortgage situations. What’s going on?

Although it seems counterintuitive, it is a common occurrence. It actually happened in September.

This should make it clear that the Fed does not set loan rates.

In other words, when they cut off, loan rates don’t go down with them. And when they go up, loan rates don’t go up. But indirect effects can happen.

What Does the Fed Rate Cut Mean for Housing Rates?

Yesterday, the Federal Reserve announced its third rate cut since stepping back from hiking nearly a year ago.

They lowered the federal funds rate (FFR) by another 25 basis points (0.25%) to achieve employment and inflation targets, known as your dual mandate.

In short, inflation is at risk of reigning, but unemployment is also at risk of rising. So they feel justified in cutting some.

On a typical day, this may have a negligible effect on mortgage rates, which are long-term rates such as 30-year fixed rates.

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

So the key here is the FFR and the 30-year fixed are very different in terms of maturity, and thus generally have little correlation.

However, the Federal Reserve does more than just cut or raise the FFR. It also communicates long-term policy objectives and produces a dot plot showing future rate cuts or increases.

This bullet point is released quarterly at the March, June, September, and December meetings within the Summary of Economic Forecasts.

It can be more consistent with mortgage rates because it provides a long-term view of monetary policy that extends several years out.

The latest shows where Federal Open Market Committee (FOMC) stakeholders see the FFR in 2025, 2026, 2027, and beyond.

In other words, it is a long-term view that is more consistent with long-term asset price levels.

And what finally got loan rates yesterday was a revised dot structure that was more hawkish in tone.

Simply put, several future rate cuts are on the cards. The long-term high may be here to stay.

Why Is The Fed Slowing Its Rate Cuts?

It was turning to economic data, which showed signs of cooling for much of the past year before warming up recently.

“The SEP’s median estimate of headline PCE inflation is 2.4 percent this year and 2.5 percent next year, slightly lower than the September target,” Powell said in prepared remarks.

“After that, the average projection falls to our 2 percent target.”

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

Or worse, they might even force the Fed to raise rates again, although Powell indicated it was unlikely in 2025.

Fed chairman Jerome Powell noted in his press conference yesterday that policymakers expressed “more uncertainty about inflation” and said, “When the path is uncertain you move slowly.”

In other words, the Fed is not sure that further rate cuts are necessary, especially if there is an effect on inflation.

Their latest dot plot supports this, showing that only a 1-2 degree decline is expected in 2025, down from 3-4 previously.

This is what drove up mortgage rates yesterday. A long-term vision, not a cutting edge.

But the Fed Admits There’s Much Uncertainty

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

It can be a rocky road getting there, as a straight line is rarely the way for anything, including mortgage rates.

On top of the uncertainty is the administration’s income, with Trump’s tax cuts and proposed tariffs seen as inflation-prone.

But again, it’s unclear what exactly will happen, although Powell admitted they expect “significant policy changes.”

However, we don’t know how those will actually play out. Could it be inflation, for sure? They can have much less impact than some expect, sure.

Could unemployment rise in 2025 while the economy falls into recession, of course!

At the end of the day, we won’t know until Trump takes office and begins his second term.

That alone may be why Fed and bond traders are so defensive, with the 10-year yield also up nearly 20 bps over the past few days.

And the Fed admits this uncertainty yesterday made things worse.

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

When it goes up, mortgage rates tend to go up, and vice versa. This explains why the 30-year fixed rate jumped from 6.875% to around 7.125%.

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

So really it all comes down to everyone who plays defensewhether it’s bond traders, the Fed, or banks and lenders.

And you can’t really blame them, given the uncertainty about inflation that accompanies the incoming new US president.

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

Economic Conditions Can Change Quickly

Let me just add one last thing. With mortgage rates rising rapidly in the past few days, he may reverse course.

If it turns out that inflation isn’t heating up anymore, and/or Trump doesn’t implement all of these proposed policies, mortgage rates may go down.

The same is true of unemployment. If claims and job losses continue to rise, as they have, the Fed will need to be accommodative again.

And there may be a flight to safety as investors dump riskier stocks and buy lower-risk bonds, helping mortgage rates.

Remember, the Fed still expects inflation to reach its target soon, despite some bumps in the road.

If you remember inflation in an upward direction, there were periods when it seemed to hit, before it got worse.

Now on the way down, there may be similar times where despite the disinflating, there are false positives and bad months of data.

But if you zoom out, it becomes even more apparent that mortgage rates could continue to decline from those 7-8% levels.

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

I still expect mortgage rates to resume their downward path into 2025, and 30-year fixed rates in the high-5s are still possible.

Read on: Mortgage rate predictions 2025