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Explanation on Fed Decision and Mortgage Rates
September 20, 2024
By Dan Habib
The Fed cut rates 50bp on September 18 to a target range of 4.75% to 5%, with the effective Fed Funds Rate at 4.875%. It’s important to remember that the Fed is not cutting mortgage rates, but rather the overnight rate that banks lend to one another. This has a direct impact on short-term rates, like credit cards, car loans, personal and business loans, and short-term treasuries, etc. And it has an indirect impact on mortgage rates.
Because of this 50bp cut, the yield curve will steepen, meaning it will be more positive. Before it was inverted, where short-term yields were higher than long-term yields, which is not normal because you would expect to get rewarded for putting your money away for longer. As the Fed cuts rates, short-term yields will fall faster than long-term yields, causing the yield curve to steepen. As this occurs, ARMs should start to come back and be more attractive.
As far as mortgage rates go, it depends on the perception and environment. In the past, there have been times where rate cuts were bad for mortgage rates because they can be inflationary. Think about it, people will be spending less on short-term loans and have more money to spend on other things, which can bid prices higher. Businesses can borrow more cheaply and create economic activity.
But in today’s scenario, the Fed has been so restrictive for so long, raising the Fed Funds Rate 525bp to 5.375%, until they cut 50bp on September 18. With Core PCE inflation, their favorite measure, at 2.6%, they could cut a lot more and still be restrictive on the economy.
Additionally, the Fed said that they would not cut until they felt inflation was under control – and that is the main driver of long-term interest rates like mortgages. The reason being, a 30-year loan or long duration Note like the 10-year gives you a fixed return for a long period of time, and if inflation is on the rise, your return gets eroded because things cost more, while the return stays the same. The only answer is higher rates.
But on September 18, the Fed cutting signals that they feel inflation is under control. After all, they were hiking to control it and said they would not cut until they were confident it was heading to their 2% goal.
Through the Fed’s Summary of Economic Projections (SEP), they signaled another 50bp of cuts this year and 100bp next year. That means economic conditions are expected to get looser. They forecast that inflation will continue to come down as they cut rates, reaching 2.2% next year, which is good for mortgage rates. Additionally, they think the unemployment rate will continue to rise this year to 4.4% – which is also good for mortgage rates. If we happen to see recession like conditions, which is possible and something the Fed fears, mortgage rates will also fall.
Bottom line: It’s possible that during this rate cutting cycle, the first cut is the deepest – meaning the Fed will likely only cut 25bp from here, unless the Unemployment Rate rises past 4.5%. Their SEP showed that all 19 Fed members don’t see the Unemployment Rate rising past that level this year, so a rise above it would likely warrant more aggressive cuts to stave off a recession.
I also believe that mortgage rates will continue to trend lower, albeit not in a straight line.

Fed Cuts Interest Rates For First Time In 4 Years: Here’s What It Means For You

The Federal Reserve took the widely expected step Wednesday of announcing its first interest rate cut in years, a move that will have a major impact on the finances of Americans across the board, making borrowing cheaper, though the golden days of high-yield savings instruments may be over.

What Do Fed Rate Cuts Do?
The Fed only officially controls the federal funds rate, which determines the interest charged in overnight cash reserve transactions between banks. But the central bank’s rate decisions affect borrowing costs across the board, as lenders typically set rates based upon the Fed-determined range, and rate cuts will more broadly ripple throughout the economy as well. Here are some of the most tangible ways rate cuts will impact everyday Amerians:

Housing
Mortgages pose perhaps the most obvious jolt for consumers from rate cuts, as mortgage rates are tightly linked to yields for government bonds, which in turn are a reflection of the Fed’s monetary policy. Mortgage rates already hit a 19-month low last week of 6.2% on 30-year fixed loans, as brokers braced for the impending rate cuts, and it’s likely the downward descent will continue as the Fed prepares to further cut rates.

Car Loans
Consumer loans will get cheaper with lower Fed rates, including auto loans, which sit now at their most expensive rate since 2001, up from 2021’s sub-5% rate for new car loans to about 8.7%. The cost of other debt like variable-rate private student loans and credit card interest should also come down.

Job Market
Companies will also reap the benefits of more accessible credit. Lower rates are typically associated with friendlier hiring as employers’ bottom lines get a boost from cheaper borrowing costs.

Savings
Perhaps the most materially negative change from rate cuts for Americans’ finances is that the high-yield savings accounts, certificate of deposit accounts and money-market funds, which offered enticing returns for savers over the last two years, will lose some of their luster. Those are tightly linked to the federal funds rate, meaning yields for those accounts will quickly fall as the Fed cuts.

How Rate Cuts Impact Stocks
Rate cuts are typically considered a boon for stocks, as money gets pulled away from lower-yielding government bonds and money market funds, leaving investors searching for more enticing returns. The U.S. benchmark S&P 500 stock index has gained 86% of the time in the 12 months after the first rate cut in a cycle dating back to 1929, according to Charles Schwab.

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