This week’s newsletter is intentionally short, making it easy to share, read, and digest. I’ll share a few strategies to help you understand the puzzling disconnect between the Fed Funds Rate and mortgage rates. For those craving more detail, the last three newsletters covered this topic extensively:
- Why Fed Day Matters Even Though Mortgage Rates Are Already Lower
- Why You Might Regret Waiting For Better Rates After The Fed Cuts
- Here’s Exactly What a Fed Rate Cut Will Do For Mortgage Rates
Alright, let’s dive into the strategies!
Strategy 1: Fed Funds Rate and Mortgage Rates – They’re Like Distant Cousins
Think of mortgage rates as being loosely related to the Fed Funds Rate but with the freedom to adjust based on what the market thinks the Fed will do before the Fed actually does it.
Since mortgage rates are based on bonds (which can change on any business day) and the Fed only adjusts its rate once every six weeks, mortgage rates tend to move earlier in anticipation. So, when mortgage rates recently dropped, it was because the Fed was essentially playing catch-up with the broader rate market. Spoiler alert: the rate market is already expecting several more cuts!
Strategy 2: Short-Term vs. Long-Term Loans – Not All Loans Are Created Equal
The Fed Funds Rate is like a one-day loan, whereas mortgages are the long-game—lasting for years. Naturally, loans with different time frames often have different rates and behave differently. Sometimes mortgage rates and short-term rates move in totally opposite directions! While this wasn’t the biggest factor this week, it’s always good to remember these differences when rates seem out of sync.
Strategy 3: Financial Markets – They Saw This Coming
Have you ever heard the phrase “buy the rumor, sell the news”? This is when traders act on events they’re sure will happen (buying the rumor), and by the time the actual news hits, they’ve already cashed in their chips (selling the news). That’s exactly what happened here—the markets knew the Fed was going to cut rates, and they reacted well before the actual announcement.
Strategy 4: Fed Day – It’s All in the Details
On Fed Day, the rate cut itself was no surprise. The real action was in the other information shared, like the dot plot and Fed Chair Powell’s press conference. The dot plot—where Fed members share their rate forecasts—was good news for bonds and rates. However, Powell’s press conference did the opposite, sending things back the other way.
And Now, a Friendly Heads-Up…
If you saw any news headlines claiming that mortgage rates dropped significantly after the Fed’s announcement, it was probably thanks to Freddie Mac’s weekly mortgage rate survey. The problem? Freddie’s survey uses a 5-day average, which can be a little out of touch with real-time rate changes. So, while we did see the lowest rates in a year and a half last Thursday and Friday, by the time the Fed announcement came around, the rates had already edged higher.
That said, rates are still very close to long-term lows, with the average lender offering rates more than 1.5% lower than the highs of late 2023. Interestingly, the Fed is planning to cut rates by about the same amount in the coming years. It’s almost as if the mortgage market has already rolled out the welcome mat for future Fed cuts!
Check out the chart below, which shows the dot plot from this week’s Fed meeting versus the one from June 2024. The blue dots are the new ones, and the red dots are from June. Notice how the dots have moved downward? Each dot represents one Fed member’s rate outlook:
And there you have it—everything you need to know about the current relationship between the Fed Funds Rate and mortgage rates. Stay tuned for more updates!