The reason mortgage rates jumped after the Fed rate cut Loaner

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

In fact, the 30-year fixed term now starts with 7 instead of 6 for most loan scenarios. What is happening?

Although it seems to defy logic, it is a fairly common phenomenon. This also happened in September.

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

In other words, if they go down, mortgage rates won’t go down either. And if they go up, mortgage rates don’t go up either. But indirect effects are certainly possible.

What does the Fed rate cut mean for mortgage rates?

Yesterday, the Federal Reserve announcement This is the third rate cut since it abandoned hikes about a year ago.

They lowered the federal funds rate (FFR) by an additional 25 basis points (0.25%) to meet employment and inflation targets, known as its dual mandate.

In short, inflation risks picking up again, but unemployment also risks increasing. They therefore felt that another reduction was justified.

Under normal circumstances, this might have no effect on mortgage rates, which are long-term rates like the 30-year fixed rate.

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

The key here is that the FFR and the 30-year fixed rate are very different in terms of maturity and therefore often have little correlation.

However, the Federal Reserve does more than just reduce or increase the FFR. It also communicates long-term policy goals and publishes a dot chart that plots future rate cuts or increases.

This point chart is published quarterly during the March, June, September and December meetings within their Summary of economic projections.

It may be more relevant to mortgage rates because it provides a longer-term expected monetary policy path, spanning several years.

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

In other words, a more relevant long-term view for long-term mortgage rates.

And what ultimately resulted in mortgage rates yesterday was a revised dot chart, which was much more hawkish in tone.

Simply put, fewer future rate cuts are on the cards. Higher and longer could be here to stay.

Why is the Fed slowing down its rate cuts?

It comes down to economic data, which showed signs of cooling for much of the past year before warming up of late.

“The SEP’s median projection for total PCE inflation is 2.4 percent this year and 2.5 percent next year, a bit higher than projected in September,” Powell said in prepared remarks.

“Thereafter, the median projection falls to our target of 2 percent.”

The fear now is of a resurgence of inflation, which would at least force the Fed to end its rate reduction cycle sooner.

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

Fed Chairman Jerome Powell noted in his press conference yesterday that policymakers had talked about “more uncertainty around inflation” and said: “When the path is uncertain, you go a little bit more slowly. »

In other words, the Fed isn’t sure further rate cuts are necessary, especially if they have an inflationary effect.

Their latest dot plot confirms this, indicating that only 1-2 rate cuts are expected in 2025, compared to 3-4 previously.

This is what pushed mortgage rates up yesterday. These are the long-term outlook, not the rate cut itself.

But the Fed admits there is a lot of uncertainty

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

The path to get there could be rocky, as a straight line is rarely the way to go for anything, including mortgage rates.

Adding to this uncertainty is the new administration, whose tax cuts and tariffs proposed by Trump are considered inflationary.

But again, it’s unclear what will actually happen, although Powell admitted he expects “significant policy changes.”

However, we don’t know how this will actually play out. Could they be inflationary, of course? Might they have a lot less impact than some think, of course.

Could unemployment rise in 2025 as the economy enters a recession, sure!

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

Perhaps that’s why the Fed and bond traders are so defensive, with the 10-year yield also up almost 20 basis points. over the last two days.

And the Fed, which recognized this uncertainty yesterday, has only made things worse.

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

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

Mortgage lenders also play a defensive role, like everyone else, because they don’t want to get caught on the wrong side of the market.

So really it all depends on everyone playing defensewhether bond traders, the Fed, or banks and lenders.

And we can’t really blame them, given the uncertainty surrounding inflation and the arrival of a new US president.

(Mortgage rates tend to fall within 12 weeks of an initial Fed rate cut)

Economic conditions can change quickly

Let me just add one more thing. As quickly as mortgage rates have risen in recent days, they could also reverse the trend.

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

The same goes for unemployment. If claims and job losses continue to rise, as they have, the Fed will have to become more accommodating again.

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

Remember, the Fed still expects inflation to reach its target goal soon, despite some hiccups along the way.

If we remember the rise in inflation, there were periods when it seemed beaten down, before getting even worse.

Right now, on the downside, there could be similar periods where, despite disinflation, there will be counterfeits and bad months of data.

But if you zoom out, it might be more obvious that mortgage rates can continue to fall from those 7-8% levels.

Unfortunately, rates still tend to take longer to fall than to rise. So patience could be the key to the game here.

I still expect mortgage rates to resume their downward trend through 2025, with 30-year fixed rates in the top 5 still possible.

Continue reading: Mortgage rate forecasts for 2025