In either case, mortgage rates will likely adjust before the Fed makes its official decision.
To understand why, consider this: mortgage rates have dropped by more than 1.5% since late 2023, even though the Fed didn’t cut rates during that time. This works the other way around, too. For example, in early 2022, mortgage rates jumped by 1.5% before the Fed increased its rates.
Let’s look at another example from late 2019, the last time the Fed cut rates under normal circumstances. Back then, the economy was slowing and inflation wasn’t a concern, so the Fed made three small rate cuts of 0.25%. Oddly enough, mortgage rates actually went up during this period.
This pattern shows that mortgage rates often move independently of the Fed’s decisions. The same goes for other common interest rates. The Fed only meets eight times a year to set rates, aside from rare “emergency cuts.” In contrast, the bond market, which influences many interest rates, can change multiple times in just a second.
This means that the financial market can act ahead of the Fed’s decisions, which partly explains why mortgage rates have dropped over the past year. The bond market anticipates changes in Fed policy, and traders adjust their actions accordingly. Some markets even bet on future Fed rate levels, like “Fed Funds Futures.” These futures are closely linked with bond yields, which are, in turn, connected to mortgage rate changes. For example, the five-year Treasury bond is a good indicator of current mortgage rate movements.
The key point is that by the time the Fed cuts rates this month, financial markets and mortgage lenders will have already adjusted their rates. However, this doesn’t mean rates will stay the same or not change after the Fed cuts its rate. Any changes in mortgage rates will more likely be driven by other factors, such as upcoming economic reports, rather than just the Fed’s rate cut.
To make things more complicated, while the Fed’s rate cut itself might not directly impact mortgage rates, the Fed’s overall policy still plays a crucial role. This influence mainly comes from what the Fed says in its statements and its quarterly projections. The problem is that these projections are released at the same time as the rate decision, making it tricky to tell what’s actually causing changes in the bond market.
For example, if the Fed’s projections are more positive than expected, mortgage rates might drop sharply on the day of the Fed’s announcement. People who don’t know better might think this drop happened because of the rate cut, but that’s not the case.
One important note is that these conclusions are based on the market’s current understanding of what the Fed is likely to do. Since 2008, the Fed has been clear about its plans for rate changes, which helps avoid surprises. The only real chance of surprise is if the market is unsure about how big the rate cut will be. This uncertainty could be present right before the September rate announcement.
We’ll have a better idea of what to expect after the first two weeks of economic data this month. Early September has several key reports that usually affect rates, with the jobs report being particularly significant. This report could either confirm or change the recent trend of favorable rates.
To put it simply, if the jobs report shows weakness, it would likely raise expectations for a larger 0.50% rate cut from the Fed. On the other hand, a strong report would probably mean a smaller 0.25% cut. In either case, mortgage rates will likely adjust before the Fed makes its official decision. FBN
By J Carnes
J Carnes is a loan officer at Mountain Country Mortgage. For additional information, J and the staff of Mountain Country Mortgage can be reached at 928-226-6908 or mountaincountrymtg.com. NMLS#243821 MB-1008082
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