Fed’s Rate Cut Fails to Lower Mortgage Rates, Leaves Homebuyers in a Bind
The Federal Reserve’s significant interest rate cut in mid-September was expected to ease mortgage rates, offering relief to prospective homebuyers. However, the opposite occurred, as mortgage rates have climbed higher since the Fed’s move.
After Fed Chair Jerome Powell lowered interest rates by 50 basis points on September 18, the average 30-year fixed mortgage rate increased instead of dropping. Data from Mortgage News Daily shows a jump of about 47 basis points, pushing the average rate from 6.15% to 6.62%.
What’s Behind the Increase?
This rise reflects a shift in investor sentiment about the Fed’s future rate-cut path, which began before the September rate cut. The 10-year Treasury yield, which strongly influences mortgage rates, has also risen, signaling investor confidence in the economy and a belief that fewer rate cuts are ahead.
A robust jobs report, showing a surprise drop in unemployment and stronger-than-expected nonfarm payroll additions, further reinforced this sentiment. Sonu Varghese, a global macro strategist at Carson Group, explained that mortgage rates increased due to a broader rise in long-term rates driven by lower recession odds amid strong payroll data.
Fed Rate Cuts: A Catch-22 for Mortgage Rates
As a result, some commentators now suggest that the Fed may not pursue additional rate cuts this year, dashing hopes for extended easing and potentially limiting any significant decline in mortgage rates.
The situation remains a conundrum. High mortgage rates are discouraging home sales, which in turn prevents a market dynamic that could help lower mortgage rates. Without aggressive Fed rate cuts, a surge in home sales could provide the clearest path to cheaper mortgages, but current elevated rates are stifling that activity.
What’s Next?
Market expectations suggest the Fed may implement two more 25-basis-point cuts this year, according to the CME FedWatch Tool. Whether these cuts will lead to lower mortgage rates remains uncertain.
Key upcoming events, including the consumer price index release this Thursday and the October jobs report in early November, will play a crucial role in shaping the future of Fed policy. If more economic relief is deemed necessary, mortgage rates could decline.
However, if the economy continues to show strength and inflation remains persistent, homebuyers hoping for rate relief may be out of luck.
