At their latest annual conference, the Federal Reserve made it pretty clear that they intend to drop their short-term rates this September, likely by a quarter of a percent. This isn’t unexpected, as the bond market has been betting on this happening for a little while now. As (sort of) a result, mortgage rates right now are as low as they’ve been since last October.
Before I make the point I came here to make, I’ll offer a brief reminder of what it actually means when the Fed lowers their Fed Funds Rate. That rate is what financial institutions charge each other to lend money to each other overnight. It is directly tied to the interest rates for things like credit cards or car loans, but has nothing to do with mortgage rates. In the past, changes to this rate have had some correlation to changes in mortgage rates, but their is no direct line. It’s more of a “this is the way the economic wind is blowing” idea that keeps them close, but there’s a lot more to it than “Fed does X, mortgage does Y.” Mortgage rates are pushed and pulled by the bond market, which moves on economic data that may or may not correlate with what pushes and pulls the Fed into their decisions.
That last point is why mortgage rates will move on the news that the Fed will make a move, but not on the actual move. When the Fed has their meeting on September 16-17 and drops their rate by a quarter percent, nobody will be surprised and mortgage rates won’t be dropping because of it.
In fact, it’s more likely that it will mean the opposite. That’s exactly what happened last year, and makes it a cautionary tale for any potential buyer who thinks the Fed drop in September will mean a lower price for them.
The Fed made three rate cuts in the last quarter of 2024 for a total of 100 basis points (which is 1%):
September 18: 50 basis points
November 7: 25 basis points
December 18: 25 basis points
Here’s what mortgage rates did during the same period:
In other words, they took a nice healthy dip through August (when the news was out that the Fed would be dropping rates), then as soon as the rates actually dropped they started sharply rising. Nothing new was learned on September 18 that would give bond traders reason to continue buying up bonds (which would push rates down), so that honeymoon we got leading up to that moment was over. The 100 basis point drop in the Fed Funds Rate and the 100(ish) basis point rise in mortgage rates happened at the same time.
There’s a much longer discourse to be had about what really pushes mortgage rates, and a lot of that has to do with sleep-inducing topics like quantitative easing and tightening. Not going there today. The point today is that short of some unexpected negative economic indicators that accompany the next Fed rate drop, there’s no good reason to expect mortgage rates to improve. If recent history is an indicator, it may be exactly the opposite.
