This week, the Federal Reserve made headlines by cutting its benchmark interest rate. However, contrary to expectations, mortgage rates responded with a significant increase. According to Mortgage News Daily, the average rate on a 30-year fixed mortgage rose by 20 basis points following the announcement made by Chairman Jerome Powell during the press conference.
The phenomenon of rising mortgage rates after a Fed rate cut is not new. In fact, a similar situation occurred during the last rate cut. The primary reason for this spike is that the bond market had already anticipated a rate reduction; however, it reacted negatively to Powell's commentary following the announcement.
On the day prior to the Fed's announcement, Tuesday, the average rate for a 30-year fixed mortgage had decreased to 6.13%. This rate matched the recent low recorded on September 16, marking the lowest level seen in a year. However, after the Fed's announcement and Powell's subsequent remarks, the mortgage rate surged by 14 basis points on Wednesday and climbed another 6 basis points on Thursday, reaching 6.33%. This figure represents an increase of a solid 20 basis points from the previous Tuesday.
Looking back to the last rate cut in September, the average mortgage rate for a 30-year fixed loan even peaked at 6.37%. This trend indicates that the market's expectations for potential future Fed rate cuts may have been overly optimistic. Matthew Graham, the chief operating officer at Mortgage News Daily, highlighted this sentiment in a client note, mentioning that the market had begun to anticipate three rate cuts in 2025.
Graham emphasized that the market was nearly 100% sure of another cut scheduled for December, while the Fed itself was less convinced. Powell explicitly pointed this out during the press conference, leading to a recalibration of yields to levels more consistent with the possibility of a December rate cut, albeit without full certainty.
The recent decrease in mortgage rates had previously triggered a surge in refinancing applications, with a staggering 111% increase year-over-year reported by the Mortgage Bankers Association last week. However, this downward trend in rates did not significantly influence potential homebuyers, who remained cautious in the current market environment.
As we continue to navigate through changing economic conditions, understanding the relationship between Federal Reserve actions and mortgage rates will be crucial for both homeowners and homebuyers. Keeping an eye on future announcements and market trends will be essential for making informed decisions in real estate financing.
