Mortgage Rates Defy Gravity
Authors & Contributors
Why are mortgage rates rising despite the Federal Reserve’s rate cuts?
Why Are Mortgage Rates Defying Gravity?
Many new borrowers have been hoping for relief with mortgage rates reaching a peak of nearly 8% in 2023, which is over double their levels from 2020 to 2021. Some relief looked in sight when the Federal Reserve (Fed) pivoted from tightening to easing mortgage rates after it gained confidence that inflation had cooled. In the run up to the Fed’s first rate cut in September, mortgage rates fell to around 6%. However, that move has partially reversed in recent months with the average rate on a 30-year fixed mortgage increasing 61 basis points (bps) since September. This is despite the Fed delivering 75 bps of cuts over that time frame. So why are mortgage rates rising in spite of rate cuts?
The yield curve’s shifting slope can explain this recent divergence. The federal funds rate target range, which is the Fed’s main policy instrument that anchors the yield curve, decreased a cumulative 75 bps to 4.5% to 4.75% since September. The Fed plans to further lower it in coming months, but at a more gradual pace given the underlying strength in the US economy and the stickiness of inflation. While interest rates in the front end of the curve and money markets are the most sensitive to moves in the federal funds rate, rates further out the curve, like 10-year and 30-year Treasuries, are driven by different factors such as bond supply (issuance) and inflation expectations. As the market started pricing in a Trump election victory in October, these factors pushed longer-term yields higher and gained steam once it became apparent that the Republicans would win the White House and both chambers of Congress.
In effect, the yield curve has steepened explaining why rates tied to the longer-end of the yield curve, like 30-year mortgages, have risen despite rate cuts. There may be increased volatility in store for rates markets given a high uncertainty around the new administration’s potential policies, which could involve lower taxes, aggressive deregulation, increased tariffs on foreign good imports and tighter immigration controls. These may create further fluctuations in the shape of the yield curve and expectations around the future path of monetary policy.
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