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In a move widely anticipated by the markets, the Federal Reserve cut its benchmark interest rate by 0.25% yesterday. However, contrary to the common belief that a Fed rate cut would lower mortgage rates, the opposite occurred. Mortgage rates skyrocketed, marking a significant and unexpected shift.
The day began with the average 30-year mortgage rate at 6.92%, but by the end of the day, it had surged past 7%, a level not welcomed by prospective homebuyers. This 0.20% increase in mortgage rates was a stark reminder that the relationship between Fed rate cuts and mortgage rates is not straightforward.
So, why did mortgage rates increase immediately following the Fed’s decision? The answer lies in the comments made by Fed Chair Jerome Powell during his post-meeting press conference. Powell indicated that instead of the anticipated four rate cuts next year, we might only see two. This revelation suggested that the Fed believes the economy is performing better than expected or that they are uncertain about future economic conditions.
Typically, mortgage rates drop when the economy is struggling. Therefore, Powell’s comments led to a snap-back reaction in the financial markets, which had already adjusted for lower rates weeks ago. The markets did not react favorably to the news of fewer rate cuts, and neither did mortgage rates.
This volatile market environment is not ideal for buyers looking to float their interest rates. The unpredictability means that locking in a rate might be a safer bet to avoid further increases.
Looking ahead, there is speculation about potential changes in the Fed’s leadership and economic policies under the Trump administration. Trump has hinted at cutting regulations and reducing spending, which could lower inflation. However, concerns about tariffs and tax cuts potentially driving inflation up remain.
Despite the current uncertainty, there is some optimism. Mat Ishbia, CEO of United Wholesale Mortgage, mentioned that they are preparing for a big year in 2025, and Compass CEO Robert Reffkin predicts that mortgage rates will stabilize around 6% over the next two years.
As always, the Fed’s stance can change quickly, and their decisions will continue to influence the housing market. Homebuyers and investors should stay informed and be prepared to adapt to these fluctuations.
