Anyone who works in the industry probably saw this coming. But those who don’t may be left scratching their heads.
Yesterday, the Fed finally backed down and cut its fed funds rate, yet mortgage rates rose. Why does this seem to happen so often?
Shouldn’t good news about interest rates lower interest rates? It seems reasonable until you dig into the details.
There are two main reasons why mortgage rates tend to resist Fed moves.
One is that Fed policy is often telegraphed and not a surprise, and the other is that the data is often baked in.
Fed Follows Economic Data
First, the Federal Reserve simply makes monetary policy decisions (increase, cut, nothing) based on the economic data in front of it.
So their FOMC statement and interest rate decision are generally not that surprising.
Yesterday, there was a little more uncertainty than usual, with both the 25 basis point and the 50 basis point cut-off opportunities.
The Fed opted to go with a 50-bps cut, which was the favorite with a ~60%+ probability per CME FedWatch.
In other words, the Fed did what the market expected, as it often does. The reason the Fed does what the market expects is because it bases its decisions on publicly available data.
And the data is somewhat old by the time the Fed makes its announcement. That takes away a lot of the surprise.
However, what can move the bond market after the FOMC interest rate decision is the press conference with the chairman of the Federal Reserve, Jerome Powell.
He explained that they took the 50-bps cut because they had been patiently waiting for inflation to drop, and now they were free to make a “hard move.”
Big cuts allow them to (hopefully) avoid a large increase in unemployment while also preventing a return to high wages.
But he added that there should be no expectation that 50-bps cuts are the new normal. Decisions will still be taken meeting by meeting.
So there are no real surprises here and there is not enough new information to keep mortgage rates down.
Mortgage Lenders Have Already Cut Rates A Ton Leading Up To The Rate Decision
Another key piece here is that mortgage lenders were already aggressively lowering mortgage rates heading into the Fed meeting.
If you look at the 30-year fixed, they are down about 150 basis points (1.50%) since the end of April.
In other words, bonds and mortgage-backed securities (MBS) have been making big moves based on data and the expected Fed pivot for months now.
Most, if not all, rate improvements were priced in before the Fed’s day. It’s kind of a “selling the news” situation.
You know something is coming so you buy bonds or MBS and when the news hits, it might be time to sell short.
In this case, it’s an expected jump in the other direction as everyone digests the widely anticipated Fed decision.
To put it another way, mortgage lenders tend to raise their rates defensively ahead of the FOMC’s interest rate decision, so there is often a relief rally after the hike.
Remember that this is just one day, and mortgage rates may form a long-term trajectory based on what happens with the Fed and underlying economic data.
But the best way to track mortgage rates is to look at 10-year bond yields and/or MBS prices.
As of yesterday, the 10-year yield has already ticked over 10 basis points and MBS prices have fallen slightly.
No big move, but perhaps a disappointment to those who thought mortgage rates would drop significantly after the Fed cut rates.
Mortgage Rates Tend to Defy the Fed
September 18, 2024: The lower the rate, the higher the loan amount
July 26, 2023: The higher the rate, the lower the loan rates
May 3, 2023: The higher the rate, the lower the loan rates
March 22, 2023: The higher the rate, the lower the loan rates
February 1, 2023: The higher the rate, the lower the loan rates
December 14, 2022: The higher the rate, the lower the loan rates
November 2, 2022: Rate rises, mortgage rates UP
September 21, 2022: The higher the rate, the lower the loan rates
July 27, 2022: The higher the rate, the lower the loan rates
June 15, 2022: The higher the rate, the lower the loan rates
May 4, 2022: The higher the rate, the lower the loan rates
March 16, 2022: Rate rises, mortgage rates UP
I was curious to know what tends to happen with mortgage rates on the day of a Fed decision so I looked at the past 12 decisions and used MND data for mortgage rate movements on the days in question.
I have included 11 rising prices from March 2022 and a bearish pivot yesterday. Unsurprisingly, as far as I know, mortgage rates tend to beat the Fed more often than not.
In other words, when the Fed raises rates, mortgage rates tend to fall. And when the Fed cuts, mortgage rates tend to rise.
I will need more data in the later patch as they continue with the expected cuts. But I wouldn’t be surprised to see this trend continue.
Just be aware that the post-Fed lending rate decision is usually irrelevant. And over time, things can change a lot.
For example, although lenders tend to cut rates on the day of a Fed hike, the long-term guidance for mortgage rates was decidedly higher.
Now we may see the opposite. With the Fed expected to make more cuts, lenders may lower rates gradually over time.
But again, not because of the Fed! It is the basic data and guidance of the economy.
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