Rates Went Way Down Because Rates Went Way Up (AGAIN)

By Jay Voorhees

July 28, 2022 3 min read

Rates Went Way Down Because Rates Went Way Up (AGAIN)

The Fed raised the Fed Funds rate by 0.75% yesterday as expected, and long-term rates have been falling ever since.

I would not beat this dead horse again but for the fact that rates are continuing their slide downward as I type, and because of how important this all is for housing and mortgages.

As a quick reminder, the Fed Funds Rate is only the rate that banks charge each other to borrow money overnight.

Paradoxically, long-term rates such as the 10 Year Treasury Yield and 30-Year Fixed-Rate Mortgages often fall in response to an increase in the Fed Funds Rate – IF the market perceives the rate increases as an effort to fend off inflation.

The markets expected the 0.75% increase in the Fed Funds Rate and had largely accounted for it or “priced it in,” so the increase itself had little effect on the markets and long-term rates.

Ironically too, if the Fed had “surprised” the markets with an even larger increase in the Fed Funds Rate (of 1.0% for example), long-term rates would have fallen even further in response.

This is because a larger increase would have been perceived as even stronger inflation-fighting medicine.

But, what caused rates to fall yesterday after the announcement of the Fed Funds increase was Chairman Powell’s comments.

Mr. Powell implied that the Fed is either done or nearly done with the Fed’s rate increases.

In addition, the markets seem to think inflation will wane and the economy will continue to soften.

And as a result, rates fell a bit yesterday and again this morning.

Why Did Bitcoin And NASDAQ Shoot “To The Moon?”

What was really interesting though was that Bitcoin and Nasdaq both “went to the moon” to quote this tweet by one of my favorite macro pundits – Alf.

Both Bitcoin and Nasdaq (the stock exchange with most of our growth and tech stocks) tend to do well in low-rate environments, and investors in those assets clearly expect low rates again (I highly recommend reading the full tweet thread though for much more detail).

Housing Should Do Well Too, Right?

In light of that, here is a question I have for all of the housing “bears” out there who think high rates tank the housing market: won’t low rates bring housing back – assuming housing performs similar to Bitcoin and the Nasdaq in low rate environments?

I actually hope low rates do NOT return us to last year’s appreciation levels, as such appreciation rates are unsustainable and the resulting housing frenzy created horrible inventory shortages.

Our current market, while slowing, is hardly “a crash” and seemingly more of a return to normal. But, I can see how a fall from close to 20% annual appreciation to 5% might seem like a crash.