Well, it happened again. The Federal Reserve announced another interest rate cut and mortgage rates rose sharply.
In fact, the 30-year interest rate now starts with a 7 instead of a 6 for most loan scenarios. What is happening?
Although it seems to defy logic, it is a fairly common occurrence. It actually happened back in September as well.
This should make it crystal clear that the Fed does not set mortgage rates.
In other words, if they cut back, mortgage rates don’t go down as well. And if they go up, mortgage rates don’t go up too. But indirect effects are certainly possible.
What does the Fed rate cut mean for mortgage rates?
Yesterday, the Federal Reserve announced its third interest rate cut since reversing from hikes about a year ago.
They lowered the federal funds rate (FFR) another 25 basis points (0.25%) to meet employment and inflation targets, known as its dual mandate.
In short, inflation risks resuming, but unemployment also risks rising. So they felt another cut was warranted.
On a normal day, this can have zero effect on mortgage rates, which are long-term rates like the 30-year fixed rate.
The Fed’s policy involves short-term interest rates, where the FFR is an overnight lending rate that banks charge each other when they borrow.
So the key here is FFR, and 30-year fixed are very different in terms of maturity and therefore often have little correlation.
However, the Federal Reserve does more than just cut or raise the FFR. It also communicates long-term policy goals and releases a dot plot that maps future rate cuts or increases.
This dot plot is released quarterly in the March, June, September and December meetings within their summary of economic projections.
It may be more relevant for mortgage interest rates because it provides a longer expected monetary policy that extends over several years.
The latest shows where Federal Open Market Committee (FOMC) participants see FFR in 2025, 2026, 2027 and beyond.
In other words, a long-term view that is more relevant to the long-term mortgage interest rates.
And what ultimately got mortgage interest yesterday was a revised dot plot that was much more hawkish in tone.
In short, fewer future rate cuts are on the cards. Higher for longer may be here to stay.
Why is the Fed slowing its rate cuts?
It boils down to economic data, which showed signs of cooling for much of the past year before warming up recently.
“The median projection in the SEP for headline PCE 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 median projection drops to our target of 2 percent.”
Fears are now of resuming inflation, which would, at a minimum, force the Fed to end its rate-cutting cycle early.
Or, at worst, maybe even force the Fed to raise rates again, although Powell indicated that was unlikely in 2025.
Fed Chairman Jerome Powell noted at his news conference yesterday that policymakers cited “more uncertainty around inflation,” saying, “When the road is uncertain, you go a little bit slower.”
In other words, the Fed is not so sure that further rate cuts are necessary, especially if they have an inflationary effect.
Their latest dot plot supports this, indicating that only 1-2 rate cuts are expected in 2025, down from 3-4 previously.
That’s what led to higher mortgage rates yesterday. The long-term outlook, not the rate cut itself.
But the Fed admits there is much uncertainty
But here’s the thing. The Fed still expects inflation to move toward its 2% target, as Powell said in his quote above.
It just might be a rocky road to get there, as a straight line is rarely the path to anything, including mortgage interest rates.
Adding to the uncertainty is the incoming administration, with Trump’s tax cuts and proposed tariffs seen as inflationary.
But again, it’s unclear what will actually happen, although Powell admitted they expect “significant policy changes.”
However, we don’t know how they will actually play out. Could they be inflationary, right? Could they be much less effective than some expect.
Could unemployment jump in 2025 while the economy falls into recession, of course!
At the end of the day, we just won’t know until Trump takes office and begins his second term.
That alone may be why the Fed and bond traders are so defensive, with the 10-year yield also up nearly 20 bps in the past few days.
And the Fed acknowledging this uncertainty yesterday just made things worse.
Remember, you can track mortgage rates by looking at the direction of the 10-year yield.
When it rises, mortgage rates tend to rise, and vice versa. This explains why the 30-year fixed jumped from 6.875% to around 7.125%.
The mortgage lenders also play defense like everyone else because they don’t want to be caught on the wrong side of the deal.
So really it’s all about everyone playing defensewhether it’s the bond traders, the Fed or banks and lenders.
And you can’t really blame them, given the uncertainty surrounding inflation combined with a new incoming 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. As quickly as mortgage rates rose higher in the past few days, they could also reverse course.
If it turns out that inflation doesn’t pick up again and/or Trump doesn’t 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, the Fed will need to be more accommodating again.
And there may be a flight to safety as investors ditch high-risk stocks and buy lower-risk bonds, helping mortgage rates.
Remember, the Fed still expects inflation to reach its target soon, despite some hiccups along the way.
If you remember inflation on the way up, there were periods when it seemed to hit before it got even worse.
Now on the way down, there may be similar periods where, despite disinflation, there are head falsifications and bad months of data.
However, if you zoom out, it may be more apparent that mortgage rates may continue to fall from these 7-8% levels.
Unfortunately, rates always tend to take longer to fall than they rise. So patience might be the name of the game here.
I still expect mortgage rates to resume their downward path into 2025, with 30-year fixed rates in the high-5s still a possibility.
Read on: Mortgage Predictions in 2025
Before creating this site, I worked as an account manager for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and existing) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
