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Why Mortgage Rates Went Up After the Fed Cut Rates
I get it- on the surface, it doesn’t make sense. You’d think lower Fed rates = lower mortgage rates. But that’s not how the markets work, and this week I got an email that did a fantastic job explaining why.
The email came from Rob Clark, who is a Senior Vice President of Mortgage Lending at Guaranteed Rate Affinity. Rob is someone I trust for insight into lending because he’s constantly plugged into what’s happening behind the scenes in the mortgage world. In his email, he shared commentary written by Jeremy Collett, a lead in Capital Markets.
Jeremy’s explanation really clicked for me, and I want to pass it along. He did such a great job breaking it down that I think buyers and sellers will find it valuable.
Despite the Fed cutting the Federal Funds Rate by 25bps last week, mortgage rates have increased sharply—ironically, by about 25bps. In fact, mortgage rates have crept higher in every trading session since the Fed rate cut. Here’s why:
- Mortgage Rates ≠ Fed Funds Rate: This Fed cut had been priced into the market for quite some time—which is why I provide daily updates on forward expectations. By the time a Fed announcement rolls around, the market has already priced in the likely outcome. Mortgage rates, for the most part, are not priced off the Fed Funds Rate, but rather longer-term bond yields plus a spread to compensate for prepayment and default risks inherent in mortgages.
- The Fed’s Dot Plot versus J-Pow: The Fed’s dot plot, which reflects the FOMC’s view of future interest rates, showed two more cuts likely in 2025, which initially caused yields to fall. But Powell’s press conference reversed that optimism by emphasizing that:
“This is not a plan.”
He clarified that the rate cut was a risk management move, not a signal of a sustained easing cycle. Powell also stressed:
“We remain squarely focused on our dual mandate.”
“Future decisions will be data-dependent.”
These phrases signaled that the Fed is not committed to further cuts, and that any future action will hinge on incoming data. Powell’s tone was less dovish than expected, and traders quickly repriced expectations.
Traders interpreted Powell’s tone as less dovish than expected, and bond yields and interest rates have been on the rise since. As such, mortgage rates have been subject to several mid-day hikes by lenders, pushing mortgage rates higher than before the cut, much like last year’s Fed cut. Better-than-expected Philly Fed and Initial Jobless Claims reports late last week also added to the upward pressure on rates.
For us market watchers, we’re back to the familiar game of following the data. Market participants are closely monitoring the following data releases, which will shape expectations for the Fed’s next move:
- Core PCE Index (9/26): The Fed’s preferred inflation gauge. A recent uptick to 2.5% QoQ suggests inflation remains sticky
- CPI & Supercore CPI (10/15): While headline CPI was soft, core and supercore readings were firmer, with supercore jumping 0.479% MoM—its highest since January
- PPI (Producer Price Index) (10/16): Offers insight into upstream cost pressures, especially relevant for housing and construction sectors
- Retail Sales & Consumer Sentiment (10/16): These will help assess demand-side inflation and economic resilience
- Employment Report & Jobless Claims (10/3): Labor market softness remains a key concern. Initial claims have declined slightly, but broader employment data will be pivotal
