Just a few years ago it was all about rate hikes, yet on Oct 30th “The Fed” announced their third .25% rate cut in just 3 months.
We’ll skip the complex intricacies about Fed rate moves (feel free to read about them here the next time you’re having trouble sleeping) and instead simplify it down to two bullet points:
- Fed rate cuts DO: attempt to stimulate the economy and increase inflation
- Fed rate cuts do NOT: directly reduce rates on first mortgages
Misunderstanding the Intent
Most believe Fed rate cuts are intended to reduce mortgage rates, but the opposite is true. If the Fed rate cuts are successful, mortgage rates will actually rise!
Don’t believe it? Look no further than the days following the October 30th rate cut: down, up, up, up, neutral, up big. That’s correct, mortgage rates increased 5 out of the next 6 trading days. In fact the 6th trading day saw the biggest one-day rate spike in the 10 Year Treasury – the primary driver of mortgage rates – since the 2016 election!
The Trend Ahead
So did the Fed’s rate cut put an end to lower mortgage rates? It’s important to reiterate: the Fed can only stimulate, not dictate. Rates trended lower in 2019 on the heels of softening economic data and falling inflation expectations. By cutting rates the Fed is effectively reacting to mortgage rates!
The trend for mortgage rates will largely be influenced by three variables: economic data, geopolitical events, and inflation. If data turns south, geopolitics falter, and inflation remains subdued, mortgage rates will trend stagnant to lower.
However, if the Fed’s rate cuts successfully stimulate the economy and increase inflation, mortgage rates will be headed north.
