Fed Cuts Rate and Refinancing Goes Nuts!
The Federal Reserve cut their target interest rate, the Fed Funds, by .25% at the conclusion of their two-day Open Market Committee Meeting on September 19th. This rate cut was anticipated by the markets and did not result in any dramatic moves in mortgage rates, up or down.
September Rate Lower Than 2018
We last hit bottom on mortgage rates on September 5th but lost all the gains, from August 5th to September 5th, in the bond market the following week. Despite the move up in mortgage rates the week of September 9th, mortgage rates were still almost 1% lower than at the same time in 2018.
Flat Bond Market
With the .25% rate cut on September 19th, there was some concern that the high CPI, Consumer Price Index, inflation numbers from the prior week would cause the bond market to continue to tank, which would have caused mortgage rates to rise following the Fed rate cut. Instead the Fed announced that inflation was tame and below their 2% target by citing the PCE, Personal Consumption Expenditure, inflation numbers. Despite the Fed citing inflation below their 2% target, which would normally be good for the bond market in conjunction with the rate cut, the markets remained flat and mortgage rates did not drop. The markets know that the CPI number being hot in September, meaning over the Fed’s 2% inflation target, is not a good sign for bonds, which caused the bond market and mortgage rates to remain flat.
Mortgage rates will continue to fluctuate day to day and week to week based on the tug of war between investor money going into stocks versus bonds, and vice versa. As for future Fed rate cuts and how they may affect mortgage interest rates the rest of this year, only 7 of the 17 Fed members think there will be another rate cut this year. Fed chair Jerome Powell will continue to make rate cut decisions based on future economic data, which means we could still see another rate cut this year if there is another big downturn in the economy. It just seems like less of a sure thing with most Fed members not in favor of another rate cut this year.
Direct Affect on Prime Rate, Not Mortgage Rates
Regardless of the current and future Fed rate cuts, we can see by the market reaction from the September 19th rate cut, Fed rate cuts do not directly affect mortgage rates.
They are an indication of what the Fed is doing to help stimulate the economy, but the Fed Funds rate directly affects only one consumer interest rate, that is the Prime rate. The Prime Rate is not tied to the vast majority of mortgage products. It only affects revolving lines of credit like credit cards and Home Equity Lines of Credit, HELOCs.
Consumers who follow the media on Fed rate cuts and think that mortgage rates will fall when the Fed cuts its target rate are not seeing the true nature of mortgage rates.
The media is selling media and doesn’t explain the lack of correlation between the Fed rate cuts and mortgage rates. It is true that many times when the Fed is cutting its target rate, mortgage rates also fall. The reality is that falling mortgage rates have much more to do with how traders are moving money into the bond market as a result of the reasons that the Fed is cutting it’s target rate to begin with.
Rate Cuts for a Sagging Economy
When the Fed cuts its target rate it is because the economy is not doing well. That action pushes traders to move money from the volatility of stocks to the relative safe haven of the bond market. When there is more demand for bonds than there is supply, that reduces the bond yield which directly reduces mortgage rates.
When to Lock a Rate
If a borrower sees a rate with closing costs that makes sense in order to benefit from a solid payment savings, locking that rate and moving on is the best path.
Gambling on Fed rate cuts is not the way to go!
We see this over and over again with mortgage rates falling to bottom levels on a handful of individual days and lasting for as little as one day or even four hours on a given day.
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