Why Mortgage Rates Didn’t Fall After the Fed’s Rate Cut
Why didn't we see mortgage rates fall after the Fed cut rates last week? Simply put, preemptive pricing left little room for movement in longer-term rates, despite the Fed's move to reduce short-term rates. The stability of mortgage rates after the Federal Reserve's 50 basis point rate cut can be attributed to both the prior market pricing of the cut and the dynamics of the yield curve. By the time the Fed made its announcement, markets had largely anticipated the cut, so there was no dramatic change in investor behavior once it was confirmed. The bond market had already factored in expectations of a slowing economy and moderating inflation that the Fed was acting on. In fact, the 10-year Treasury, which historically moves relatively in tandem with mortgage rates, actually rose 8 basis points over the course of last week.
The shape of the yield curve also helps to explain why mortgage rates did not react sharply. Normally, long-term rates are higher than short-term rates to compensate for increased risk over time. However, the yield curve has been inverted for nearly two years, signaling a potential recession, with short-term rates rising above long-term yields. When the Fed cut rates, it un-inverted the yield curve slightly, but this adjustment did not impact long-term yields in a way that would bring down mortgage rates. Investors remained cautious, holding onto the view that the Fed’s tightening cycle was temporary, expecting that rates would normalize over time as inflation was brought under control.
Long-term rates are driven more by expectations for future economic growth and inflation than by the Fed’s short-term rate adjustments. With the market anticipating that inflation would ease, and the economy would avoid a deep recession, there was little impetus for the 10-year yield to drop. This environment of cautious optimism meant that while short-term rates fell, long-term rates, including those tied to mortgages, stayed steady, reflecting a balance of investor expectations about future growth and inflation.
Ultimately, the Fed's rate cut had already been priced into the market, and the modest unwinding of the inverted yield curve was not enough to move long-term yields significantly. Investors, wary of future economic conditions and reassured by the Fed's strategy to ease inflation, kept longer yields stable. Without a significant change in long-term yields, mortgage rates remained largely unaffected by the rate cut. This illustrates that Fed policy on short-term rates doesn’t always translate directly into shifts in long-term mortgage rates, especially when broader market expectations and economic forecasts are already baked into pricing.