Well, it happened again. The Federal Reserve announced another rate cut and mortgage rates surged higher.
In fact, the 30-year fixed now starts with a 7 instead of a 6 for most loan scenarios. What’s going on?
While it seems to defy logic, it’s a pretty common occurrence. It actually happened back in September too.
This should make it crystal clear that the Fed doesn’t set mortgage rates.
In other words, if they cut, mortgage rates don’t also go down. And if they hike, mortgage rates don’t also go up. But indirect effects are certainly possible.
What Does the Fed Rate Cut Mean for Mortgage Rates?
Yesterday, the Federal Reserve announced its third rate cut since it pivoted from hikes about a year ago.
They lowered the federal funds rate (FFR) another 25 basis points (0.25%) to achieve employment and inflation goals, known as its dual mandate.
In short, inflation is at risk of reigniting, but unemployment is also at risk of rising. So they felt another cut was warranted.
On a normal day, this might have zero effect on mortgage rates, which are long-term rates like the 30-year fixed.
Fed policy involves short-term rates, with the FFR being an overnight lending rate that banks charge one another when they need to borrow.
So the key here is the FFR and 30-year fixed are very different in terms of maturity, and thus often have little correlation.
However, the Federal Reserve does more than just cut or raise the FFR. It also communicates long-term policy objectives and releases a dot plot that maps out with future rate cuts or hikes.
This dot plot is released quarterly in March, June, September, and December meetings within their Summary of Economic Projections.
It can be more relevant to mortgage rates because it provides a longer expected path of monetary policy extending several years out.
The latest shows where the Federal Open Market Committee (FOMC) participants see the FFR in 2025, 2026, 2027, and beyond.
In other words, a long-term view that is more relevant to long-term mortgage rates.
And what ultimately got mortgage rates yesterday was a revised dot plot that was a lot more hawkish in tone.
Simply put, fewer future rate cuts are in the cards. Higher for longer might be here to stay.
Why Is the Fed Slowing Down Its Rate Cuts?
It boils down to economic data, which was showing signs of cooling for much of the past year before warming up lately.
“The median projection in the SEP for total PCE inflation is 2.4 percent this year and 2.5 percent next year, somewhat higher than projected in September,” Powell said in prepared remarks.
“Thereafter, the median projection falls to our 2 percent objective.”
The fear now is inflation reigniting, which would at minimum force the Fed to end its rate cutting cycle early.
Or at worst, possibly even force the Fed to hike rates again, though Powell indicated that was unlikely in 2025.
Fed chair Jerome Powell noted in his press conference yesterday that policy participants cited “more uncertainty around inflation” and said, “When the path is uncertain you go a little bit slower.”
In other words, the Fed isn’t so sure additional rate cuts are necessary, especially if they have an inflationary effect.
Their latest dot plot backs this up, indicating that only 1-2 rate cuts are expected in 2025, down from 3-4 previously.
This is what pushed mortgage rates higher yesterday. The long-term outlook, not the rate cut itself.
But the Fed Admits There’s a Lot of Uncertainty
Here’s the thing though. The Fed still expects inflation to move toward its 2% target, as Powell said in his quote above.
It just might be a rocky road getting there, as a straight line is rarely the path for anything, including mortgage rates.
On top of the uncertainty is the incoming administration, with Trump’s tax cuts and proposed tariffs seen as inflationary.
But again, it’s unclear what will actually happen, though Powell did admit they expect “significant policy changes.”
However, we don’t know how those will actually play out. Could they be inflationary, sure? Could they be a lot less impactful than some expect, sure.
Could unemployment jump in 2025 while the economy falls into recession, sure!
End of the day, we just won’t know until Trump gets into office and begins his second term.
That alone might be why the Fed and bond traders are being so defensive, with the 10-year yield also up nearly 20 bps in the past couple days.
And the Fed acknowledging this uncertainty yesterday just made matters worse.
Remember, you can track mortgage rates by looking at the direction of the 10-year yield.
When it rises, mortgage rates tend to rise, and vice versa. This explains why the 30-year fixed jumped from 6.875% to around 7.125%.
Mortgage lenders are also playing defense like everyone else because they don’t want to get caught out on the wrong side of the trade.
So really it all comes down to everyone playing defense, whether it’s the bond traders, the Fed, or banks and lenders.
And you can’t really blame them, given the uncertainty around inflation coupled with a new incoming U.S. president.
[Mortgage Rates Tend to Fall Within 12 Weeks of a First Fed Rate Cut]
Economic Conditions Can Change Quickly
Let me just add one last thing. As quickly as mortgage rates surged higher the past couple days, they could also reverse course.
If it turns out inflation isn’t heating up again, and/or that Trump doesn’t implement all this proposed polices, mortgage rates could go back down.
The same goes for unemployment. If claims and job losses keep rising, as they have been, the Fed will need to be more accommodative again.
And there could be a flight to safety as investors ditch high-risk stocks and buy lower-risk bonds, which helps mortgage rates.
Remember, the Fed still expects inflation to meet its target objective soon, despite some hiccups along the way.
If you recall inflation on the way up, there were periods where it seemed beat, before getting even worse.
Now on the way down, there might be similar periods where despite disinflating, there are head fakes and bad months of data.
But if you zoom out, it might be more evident that mortgage rates can continue to come down from those 7-8% levels.
Unfortunately, rates always tend to take longer to fall than they do go up. So patience might be the name of the game here.
I still expect mortgage rates to resume their downward path into 2025, with 30-year fixed rates in the high-5s still a possibility.
Read on: 2025 mortgage rate predictions
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.