We have had dozens of borrowers tell us that they want to wait to refinance or buy until after the Fed lowers rates in September.
Sigh.
Yes, rates are expected to trend downward, and yes, the economy is finally showing clear recessionary signals (see the labor market), and yes, the stock market could likely correct again, per Brent Johnson’s podcast yesterday.
But, rates never move in a straight line, Jeff Snider is predicting higher rates in September (more on that below), and, most importantly, the market has already priced in the Fed rate cuts!
I often encourage agents to share excerpts from my blog with their clients (with an attribution of course 😊), and I am encouraging agents to share the below excerpt because so many buyers are on the sidelines (waiting on the Fed) and because it is so educational in general.
Rates Often Do Not Go Down When the Fed Cuts Rates; Here’s Why
- The market has already priced in the cuts. According to this article, Traders now betting on smaller Fed rate cut in September, traders are expecting a September rate cut. And, when that is the case, current rates typically reflect future cuts. As a result, rates move very little in response to the announcement of the actual rate cut. If a rate cut is a surprise, however, rates could move in response.
Interestingly too, rates could move in either direction in response to a rate cut. If a rate cut is deemed to be “inflationary,” a surprise announcement could actually result in higher rates, although that is rare. - 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 last six months in fact, as long-term rates have fallen about 1% while the Fed Funds Rate has held steady.
- 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.
Why Rates Could Likely Go Up in September
In this recent podcast, I’ve Changed My Mind, I Think Interest Rates are About to Rise, Here’s Why, permabear and incessant recession-predictor Jeff Snider, explains why it is likely that rates will go UP in September – DESPITE all of the negative economic signals that he harps on non-stop.
The reason is what Snider calls the “September Effect,” where rates edge higher around almost every September for reasons Snider can’t explain. But he does bring the charts to show that it is a very real phenomenon.
Will Rates Go Up for Sure in September?
No. There are no certainties ever. Past trends merely imply the likelihood. But, many things could still bring rates down despite past trends, such as very negative economic news, a black swan event like the Lehman collapse we saw in 2008, a larger-than-expected Fed Rate cut, or a large stock market correction.
But I would not expect a Fed rate cut, which almost 70% of bond traders already expect, to bring rates down.
