Almost everyone at JVM was in tears yesterday – and this is why.
Borrowers kept calling us up and saying, “I heard the Fed cut the rate.”
The Fed did indeed cut the “Fed Funds Rate” by 25 basis points, but mortgage rates skyrocketed higher (by 1/4%!).
Mortgage rates did NOT shoot higher in response to the rate cut though; they shot higher in response to Fed Chair Powell’s comments – and that is a key takeaway from this blog.
When the markets fully anticipate a cut in the Fed Funds Rate like they did yesterday, the markets never respond to the actual cut because it has already been “priced in” or fully accounted for.
What the markets respond to in those situations is either (1) the comments the Fed chair makes along with the rate cut announcement; and/or (2) other economic information that might surface around the time of the rate cut.
And yesterday, it was the comments that sent the markets into a tailspin, and the stock market tanked along with the bond market.
3 Reasons Why Mortgage Rates Don’t Fall When the Fed Cuts
As a quick reminder, this is the blog I wrote to explain 3 Reasons Mortgage Why Rates Don’t Always Fall When The Fed Cuts Rates. TLDR: (1) the markets anticipate the cuts and account for them prior to the cuts; (2) the Fed does not control long-term rates; and (3) factors other than the Fed influence long-term rates.
This excellent Kobeissi Letter post explains that it was the Fed’s “hawkish” 2025 outlook that spooked the markets yesterday. The Fed rolled down the number of projected rate cuts in 2025 while also increasing its inflation projection.
This is another reminder that our stock and bond markets seem to be addicted to consistently lower and lower rates.
Will High Rates Persist?
Jeff Snider and George Gammon were on this YouTube video yesterday with some very interesting observations.
- Fed Will Cut 2% Next Year: Snider says the markets (the “SOFR Curve”) are predicting that the Fed Funds Rate will get cut to 2.5% or lower next year (it’s now at 4.25% after yesterday’s cut). So Snider does not think this will last.
- Inflation: The markets and the WSJ are panicked by the reemergence of inflation, but Gammon reminds us that we saw even higher inflation numbers with a very similar rate-cutting cycle in 2007, as CPI was over 3% in late 2007 and it hit 5.6% in August of 2008– when rate increases were being discussed. We of course then saw actual DEFLATION after the 2008 meltdown. CPI is well under 3% right now, as a reminder.
- Parallels to 2007: Today’s rate-cutting cycle mirrors 2007s almost exactly, with very similar concerns (inflation) and patterns.
- Fed Is Clueless: The situation is so complex that the Fed cannot begin to actually know what will happen in 2025, per Snider, and that is made abundantly clear by how divergent the Fed members are with their various projections.
- Concerns/Why Snider Remains So Adamant: Snider has been predicting financial Armageddon for years, but he continues to insist (1) that the world has to pay for the massive COVID lockdowns and monetary infusion at some point (and we haven’t yet); (2) that the liquidity that is driving the market will dry up, as or if banks stop lending and asset prices correct; (3) that the world economy is too intertwined for the U.S. not to follow China, Canada, and Europe; and (4) that the labor markets are very weak and will get weaker like they do at the start of every downturn.
- Dollar Wrecking Ball: The dollar surged in value yesterday, and it is wreaking havoc across the world right now for reasons I explained in this blog: Dollar Shortage Threatens World.
