Last week, Fed Chair Powell strongly implied that the Fed would cut rates in September.
Markets immediately responded (so they probably won’t respond again when the Fed actually cuts), rates fell, and we immediately started to lock refinances (and purchases) in droves.
I point this out because borrowers almost always say, “I want to wait and lock in my rate after the Fed cuts rates.”
I beat this dead horse last fall when the Fed was cutting because we heard the same thing from borrowers repeatedly.
Fortunately, we were able to educate borrowers, and we locked in dozens of refinances before rates shot higher (as a result of the Fed rate cut!)
We had many acquaintances, though, at other lenders who were not able to convince their clients to act, and ALL of those clients missed out.
This is why this message matters so much! If borrowers don’t get this message and they decide to “wait for the Fed to cut,” they will likely miss an opportunity to lock in a much lower rate.
Hence, I am repeating this blog from last year:
3 Reasons Mortgage Rates Don’t Always Fall When The Fed “Cuts Rates”
Here are three reasons why mortgage rates sometimes move in the opposite direction of the Fed – or don’t move at all – when the Fed announces a rate cut.
#1 – The market has already priced in the cuts.
The Fed often broadcasts or implies its intentions long before it announces or makes an actual rate cut. In addition, economic conditions sometimes make rate cuts all but inevitable. And journalists often survey bond traders too to see if they are expecting a rate cut. In any case, when rate cuts are generally expected, the market will often price them in or account for them with current interest rates days or even weeks before the Fed officially announces a rate cut. So when the Fed does finally make a cut, the market does not react or reacts paradoxically.
Interestingly, too, rates could move in either direction in response to an actual or expected rate cut. If a rate cut is deemed to be “inflationary,” for example, a surprise announcement could actually result in higher rates, like we saw in the fall of 2024. NOTE: Renowned analyst, Jim Bianco, thinks this will happen again.
#2 – 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 first two-thirds of 2024, in fact, when long-term rates fell about 1% while the Fed Funds Rate did not move at all.
#3 – 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.
