Interest rates shot higher yesterday after the Fed signaled there would be no further interest rate cuts this year.
And because 99% of Americans mistakenly believe the Fed is all-powerful when it comes to all interest rates, I am going to dispel the Fed myth one more time.
We share these blogs with clients who insist on “waiting for the Fed to cut” before buying homes or locking in rates.
SIDEBAR: This post explains that for every $1 rise in gas prices, the sitting president loses 6% of his support – meaning Trump has now lost 15% of his support. A) It is super interesting. B) You can be damned sure Mr. Trump is aware of this, so it will be interesting to see him pull out all the stops to push oil and gas prices lower. And that bodes well for rates.
Why the Fed’s Almost Irrelevant When It Comes to Mortgage Rates – Part XXVII
- The Fed only controls the Fed Funds Rate – the very short-term overnight bank-to-bank lending rate – NOT long-term rates. The Fed has almost no control over long-term rates like the 10-Year Treasury and mortgage rates.
Remember the fall of 2024 again – when the Fed cut the Fed Funds Rate by a full 1% – only to watch the bond market push long-term rates up by 1% over the same period.
- The bond market controls rates – and the Fed follows it. The bond market controls long-term rates, responding entirely to growth and/or inflation expectations. The Fed primarily just follows the 2-Year Treasury yield. So, watch that yield; if it continues to shoot higher, the Fed could actually raise rates.
- The Fed will pivot on a dime if economic conditions change. In the summer of 2008, the Fed was seriously considering raising rates to fend off inflation (almost 6%). That was, however, only a few months before Lehman’s collapse, the start of the Great Financial Crisis, and the wind down to a 0% Fed Funds Rate. We’ve seen similar fast pivots in response to stock market crashes and COVID.
- The Fed is clueless. The Fed misses the mark constantly. They held rates too low and engaged in too much QE after COVID (believing inflation was “transitory”), and exacerbated inflation. They held rates too high in the years following COVID. They held rates too low after the dot-com crash, exacerbating the housing meltdown. They got the Great Depression entirely wrong (held money way too tight), and they were similarly clueless during the Great Inflation of the 1970s.
TLDR: Long-term rates are gonna do what long-term rates are gonna do, almost irrespective of the Fed.
And the biggest factor right now is OIL.
