Why Have Mortgage Rates Increased Despite the Fed’s Decision to Cut on September 18, 2024?

The Federal Reserve's decision on September 18, 2024, to cut interest rates was initially expected to provide relief across various markets, including housing. Yet, mortgage rates moved in the opposite direction, sparking confusion for many. To understand why mortgage rates have risen, we need to look beyond just the Fed’s rate cut and consider several underlying factors:

1. Short-Term vs. Long-Term Rates

The Fed controls the federal funds rate, which is a short-term interest rate impacting overnight borrowing between banks. Mortgage rates, on the other hand, are long-term rates, usually influenced by broader economic trends. While Fed decisions can indirectly impact mortgage rates, other factors—such as bond yields and inflation expectations—play a more direct role in shaping them.

2. Inflation Concerns

Despite the Fed’s rate cut, persistent inflation concerns have kept mortgage rates elevated. Inflation erodes the purchasing power of money over time, and mortgage lenders demand higher rates to compensate for that risk. The Fed's decision to cut rates in response to slower economic growth might signal that inflation is proving more difficult to control, raising long-term borrowing costs like mortgage rates. This has caused bond yields to rise, which in turn pushes mortgage rates higher.

3. Bond Market Influence

Mortgage rates are closely tied to the yield on 10-year Treasury bonds, which are considered a safe benchmark for long-term borrowing. When the Fed cuts rates, investors often flock to bonds for safety, driving bond prices up and yields down. However, in the current environment, investors are concerned about inflation and potential economic stagnation, causing bond yields to increase rather than decrease, thus pushing up mortgage rates.

4. Economic Uncertainty and Investor Sentiment

The Fed's decision to cut rates signals caution about the economic outlook. While rate cuts can stimulate growth, they also raise questions about the broader health of the economy. If investors believe the economy may struggle despite the cut, they could demand higher returns on long-term investments like mortgages. This “risk premium” leads to higher mortgage rates as lenders look to mitigate potential future risks.

5. Fed's Ongoing Strategy

Although the Fed cut rates, it also hinted that this might be one of the final rate reductions in this cycle. If market participants expect the Fed to stop cutting rates or even start raising them again, mortgage rates could rise in anticipation. Markets often price in future Fed actions well before they happen, causing mortgage rates to adjust accordingly.

Conclusion

The Fed's rate cut on September 18, 2024, may have provided short-term relief to certain sectors, but its impact on mortgage rates has been less favorable due to inflation concerns, bond market movements, and broader economic uncertainty. Mortgage rates reflect a complex interaction of market forces, many of which are currently pushing them higher despite the Fed's efforts to ease monetary conditions.

Understanding these nuances can help homebuyers and borrowers better navigate this fluctuating landscape. While the Fed’s actions often play a role, the trajectory of mortgage rates depends on a broader set of economic factors.