Here are three reasons why mortgage rates sometimes move in the opposite direction of the Fed – or don’t move at all – when the Fed announces a rate cut.
#1 – The market has already priced in the cuts.
The Fed often broadcasts or implies its intentions long before it announces or makes an actual rate cut. In addition, economic conditions sometimes make rate cuts all but inevitable. And journalists often survey bond traders too to see if they are expecting a rate cut. In any case, when rate cuts are generally expected, the market will often price them in or account for them with current interest rates days or even weeks before the Fed officially announces a rate cut. So when the Fed does finally make a cut, the market does not react or reacts paradoxically.
Interestingly too, rates could move in either direction in response to an actual or expected rate cut. If a rate cut is deemed to be “inflationary,” for example, a surprise announcement could actually result in higher rates, although that is rare.
#2 – The Fed does not control long-term (mortgage rates).
The Fed only controls the very short-term (overnight) Fed Funds Rate. It can influence long-term rates, but it does not control them. We saw this take place over the first 2/3 of 2024 in fact, when long-term rates fell about 1% while the Fed Funds Rate did not move at all.
#3 – Many factors other than the Fed influence interest rates.
Long-term interest rates are controlled primarily by bond investors, based on their economic growth and inflation expectations. If they expect strong economic growth and/or inflation, they will demand higher yields (rates), and mortgage rates will climb as a result. Bond traders watch inflation signals (CPI, PPI, PCE) carefully, while also watching growth signals (employment numbers, consumer sentiment, GDP data, manufacturing data, retail sales, housing starts, etc.). These factors can often outweigh anything the Fed says or does.
