Why mortgage rates are up despite Feds move
So, I’ve been thinking a lot about how interest rates work, especially with all the news about the Fed and how it’s supposed to affect things like mortgage rates. I read something interesting on pengarkredit.wordpress.com that made me question how everything is connected. In September, the Federal Reserve announced they’d be cutting rates by 50 basis points. At first, this seemed to have the desired effect. Mortgage rates for 30-year loans in the U.S. were actually falling steadily leading up to the Fed’s FOMC meeting, reaching about 5.89%, which was the lowest they’d been in over two years. But then something weird happened. Right after the meeting, instead of going down even more, mortgage rates went up! And not by a little bit either—by a whole 10 basis points!
So, what gives? Why did mortgage rates suddenly rise when they’d just hit a two-year low?
Okay, here’s what I think might be happening. When the Fed decides to change the federal funds rate, they’re really just changing the interest rate that banks charge each other when they lend money overnight to meet their reserve requirements. So, this directly affects things like personal loans and credit card rates, but it doesn’t have the same straightforward impact on mortgage rates.
According to the website, this might explain why mortgage rates started dropping before Fed Chairman Jerome Powell even had his press conference. It’s like everyone in the market already knew what was going to happen, and the lower rates were kind of “baked in” ahead of time. Lenders don’t just sit around waiting for Fed announcements. They’re constantly responding to a bunch of other economic signals, which causes these little temporary fluctuations that don’t always make sense at first glance. It seems like they’re balancing the risk of lending in today’s market, and that causes some surprising swings.
Here’s an example: A few weeks before the Fed meeting, the Bureau of Labor Statistics (BLS) released a jobs report that wasn’t super great. This can often make lenders nervous about a possible economic downturn, so they might raise mortgage rates. That happened after the jobs report on August 2. But on the flip side, when inflation reports come out showing that inflation is under control (like the one on September 11), mortgage rates tend to drop. And that’s exactly what happened just before the Fed meeting.
So, yeah, both the Federal Reserve and mortgage lenders ended up lowering their rates around the same time, but that was more of a coincidence than one causing the other. They were all reacting to the same economic indicators.
But here’s where it gets complicated. What happens when these economic indicators are a little too positive? Like, if the BLS suddenly releases a much better-than-expected jobs report, the Fed might think, “Hey, the economy is doing fine,” and decide to lower rates less than people were hoping for. So, you might be wondering, if the federal funds rate and mortgage rates are only loosely connected, why would a smaller-than-expected rate cut lead to mortgage rates rising again?
Well, it has a lot to do with something called the 10-year Treasury bond yield.
Basically, when the economy is doing well, investors tend to sell off safer investments like bonds and put their money into riskier things like stocks. When that happens, the price of those bonds goes down, which makes their yields go up. Banks and mortgage lenders use the yield from 10-year Treasury bonds as a sort of benchmark when they set mortgage rates. They’ll usually add a percentage point or two on top of the bond yield to determine mortgage rates, though sometimes the gap can get as big as 2.5 percentage points, like it has been recently.
And here’s where it all comes together: On October 4, the BLS released a jobs report showing that the economy had added 254,000 jobs in September, which was almost 100,000 more than in August. This surprised a lot of experts, who quickly revised their predictions for Fed rate cuts down to just 25 basis points. That led to a big selloff in bonds, which drove the 10-year Treasury yield up to over 4% when markets opened the following Monday. And unfortunately for anyone looking to buy a house, mortgage rates followed suit. According to pengarkredit.wordpress.com, mortgage rates have now been consistently more than 2 percentage points higher than the 10-year Treasury bond yield this week.
So yeah, even though the Fed cut rates, mortgage rates can still go up. It’s all about how investors, lenders, and the broader economy respond to these different signals. The relationship between the Fed’s moves and mortgage rates isn’t as straightforward as we might hope!