Fed Raised “Rates” The Most Since 1994 – And “Rates” Fell
The Fed raised the Fed Funds Rate by 75 basis points (0.75%) yesterday, as most readers know.
What readers don’t know though is that mortgage rates largely fell in response to the news.
Reasons Mortgage Rates Fell After The Fed Raised Rates
Here are several reasons why rates fell yesterday.
- Inflation Fighting. The bond market is most afraid of inflation (nothing pushes rates up faster than inflation news), and the sharp rate increase was perceived as a serious effort to fend off inflation. So, rates fell in response.
- Markets Expected The News. The Fed purposely let “rumors” spread that they planned to increase the Fed Funds Rate by 75 basis points prior to the announcement (to avoid too much of a surprise), so the markets anticipated the news to some extent and had already priced it in.
- Fed Funds = Short-Term Rate/Mortgage Rates Are Long-Term. This is something I remind readers often: The Fed controls the Fed Funds Rate, which is a very short-term rate (overnight rate) that banks charge each other to borrow funds overnight. And short-term rates do not always move in unison with long-term rates like mortgage rates. We in fact often see mortgage rates move in the opposite direction of the Fed Funds rate, depending on market perceptions.
Why Did Rates Go Up Today? (Central Banks Seem Too Worried)
The Swiss Central Bank announced it was increasing its benchmark rate by 50 basis points this morning, which was a surprisingly large move for them.
The markets perceived that announcement as an indication that the Swiss and other central bankers believe inflation is more of an issue than they are publicly indicating.
As a result of those renewed inflation concerns, rates shot up (although they seem to be coming back down a bit as I type this blog).
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