Well, it happened again. The Fed lowered interest rates and mortgage rates rose sharply.
Not the first time and certainly won’t be the last.
I warned that this could happen and actually said it was the most likely outcome before the Fed released its announcement yesterday.
As for why, well, of course it was the press conference, as it always seems to be.
That’s when the Fed chair has the opportunity to bring additional color to the conversation, which Powell certainly did.
Mortgage rates jump as the Fed cuts again
If it feels like déjà vu, that’s because it is. The Fed cut interest rates as everyone expected and mortgage rates rose as I and others expected.
And the reason I expected it was because there is precedent. If we look at just the last 15 Fed rate decisions, mortgage rates moved the OPPOSITE way of the Fed 12 times.
In the 16th rate decision this cycle (11 hikes and now 5 cuts) that took place yesterday, the Fed and mortgage rates diverged once again.
So the odds were in favor of higher mortgage rates, just looking at the statistics.
If we consider that they have defied the Fed 12/15 times, there is an 80% probability that it would happen again. And it did.
As for why it happened, no, it wasn’t because it just happens every time. That was because Jerome Powell essentially threw cold water on the recent bond rally.
A much-anticipated rate cut in December is not a guarantee
What arguably drove mortgage rates higher, other than perhaps a simple reversal after a big move lower, were comments from Powell.
After the FOMC announcement, he takes questions from reporters and makes prepared remarks.
One thing that stood out was that he said: “A further cut in the policy rate at the December meeting is not a foregone conclusion. Far from it.”
Of course, we all know it’s meeting for the meeting and that things are always changing, but the “far from” comment seemed to upset the bond market.
And bond yields, namely the 10-year bond yield that dictates mortgage rates, shot higher.
It bounced back above the key 4% threshold and last traded around 4.09%. And had also briefly risen above 4.10%.
Powell also said: “In the committee’s deliberations at this meeting, there were starkly different views on how to proceed in December.”
Of course, part of that was Trump picking Stephen Miran, who wanted a 50 basis point cut, while Kansas City Fed President Jeffrey Schmid supported no cut at all.
In short, another 25bp cut for December is now on the cards, but if we’re honest, it always has been.
To me, this just seems like typical Powell playing down anything as a guarantee, especially when the market gets ahead of itself. He likes to push back.
But a month from now we may well see another Fed rate cut, which still has overwhelmingly strong odds of 73%, per CME FedWatch.
Mortgage interest rates needed a breather
So maybe bonds (and mortgage rates) just needed a breather given the recent downward movement.
Remember, the 30-year fix was hovering around 3-year lows, so a rejection level higher was somewhat expected, at least for me.
Zooming out, chances are the Fed will continue to cut, especially as more of the Trump appointees gain more power.
To me, this was an expected hiccup, but it doesn’t change the long-term trajectory of mortgage rates, which continue to move lower over time. And are almost at levels below 6%.
In case you missed it, the Fed also announced the end of its Quantitative Tightening (QT), and will now reinvest maturing MBS into short-term Treasuries.
That could lead to even lower interest rates on adjustable rate loans and push more homeowners into such products.
Finally, the Fed’s latest cut also lowers the prime rate by the same amount, meaning HELOCs just got another 0.25% cheaper. That’s a plus for anyone who keeps one or is considering taking one out.
