SPECIAL REPORT: Why Mortgage Rates Went Up After the Fed Cut Rates

According to Freddie Mac data, mortgage rates went up by 0.75% after the Federal Reserve started cutting short-term interest rates in September 2024. Here are two reasons why mortgage rates are higher now than they were before the Fed started cutting short-term rates:

1. MORTGAGE RATES ARE TIED TO THE BOND MARKET, NOT THE FED.

The Fed controls a short-term interest rate known as the Fed Funds rate. This impacts the Prime rate, which impacts home equity lines of credit, business loans, and credit cards. Mortgage rates, on the other hand, fluctuate daily based on the supply and demand for mortgage-backed bonds in the bond market. That's why, according to Freddie Mac data, mortgage rates dropped by over 1% throughout the summer of 2024, even before the Fed began cutting rates in September. The bond market was betting on future Fed rate cuts well into 2025, and those bets were priced into mortgage rates well before the Fed started cutting rates in September. However, those bets in the bond market were reversed in October and November of 2024 as you'll see in point #2.

2. MORTGAGE RATES SHOT UP DUE TO CHANGING DYNAMICS IN THE BOND MARKET.

Strong economic data, persistent inflation, and soaring government budget deficits caused the bond market to reverse its bets on future Fed rate cuts. The bond market now believes that interest rates, inflation, and government spending will remain elevated throughout 2025. Bond traders aren't very confident about future Fed rate cuts and have reversed the previous bets they had in place, driving up bond yields and mortgage rates. This "hunch" that future rate cuts won't happen was confirmed at the latest Federal Reserve meeting. Many Fed policymakers have now reduced their projections for future rate cuts. This begs the question, "What's next for mortgage rates?" The answer is that it all depends on the bond market's reaction to three things:

• Incoming economic data
• Fears and worries about inflation
• Bets about the supply and demand for bonds in light of massive government budget deficits.

As always, I'll keep you informed as things develop. Contact me for more information about how this may impact your home buying or selling decision!

NUMBER OF THE WEEK

$1.83 Trillion - That was the government spending deficit in fiscal year 2024. We funded this shortfall by flooding the bond market with supply, driving up bond yields and long-term interest rates, including mortgage rates.

Source: Momentifi