Fed Cuts Rates but Mortgage Rates Go Up – Why?

This week’s Federal Reserve (Fed) meeting saw the results that markets expected with a .25% Fed Funds Rate cut. Since the BLS jobs report came out earlier this month, mortgage rates have had a significant shift lower by almost .5% in 30-year rates. This has been a welcome relief to the housing market. Unfortunately, this Fed meeting seems to have put a (hopefully) temporary floor on that decline. 

How the Fed Funds Rate Works

As a reminder, the Federal Funds Rate is the rate banks charge each other for overnight borrowing. This is a very short-term rate that is measured in days. Obviously, when the cost of borrowing to banks declines, that eventually trickles through to longer-term debts.  

Mortgage rates are not directly influenced by this Fed rate cut. The expectation of future rate cuts is what influences the supply and demand of Mortgage-Backed Securities, and that is what changes mortgage rates. 

Like the stock market: XYZ stock has a blockbuster earnings report, but their stock goes down. Why? The markets were expecting an even stronger blockbuster report. The expectations weren’t met and the stock price declines. 

Powell’s Hawkish Comments Pressure Markets

In this week’s Fed meeting, Chairman Powell took a hawkish (not pro-rate cut) tone when answering questions. The Summary of Economic Projections (SEP) was released and showed that while a majority of members favored additional rate cuts, there was a clear division that showed several members projected no further cuts and even one projecting a rate hike.

It is clear that some members of the Fed are focused on the employment side of their mandate and are prepared to cut rates to bolster the sagging jobs market. 

Other members are focused on the inflation side of the mandate and see that Core inflation rates remain above the 2% target and rate cuts should not be used. 

Cotality Rent Index: Inflation Overstated

This commentary has spoken often and will likely continue to discuss the lags in shelter costs that are artificially keeping inflation high. This week, Cotality (formerly Corelogic) released its Rent Index that showed only a 0.2% monthly increase in July. That is well below the historical average for that month of 0.7%. Yearly prices decelerated to 2.3%. 

If these figures were captured in the inflation reports, we would see Core CPI lower by 0.5% and Core PCE lower by 0.3%. Those are significant differences that would assuage fears of inflation. 

We also have seen encouraging inflation reporting that shows, despite the threat of the tariffs, inflation hasn’t exploded, as feared. 

Unemployment Claims: Mixed But Elevated

We have also repeatedly explored the significantly worsening on the employment side of the economy. The significant revisions downward to the employment numbers paints a bleak picture. This week’s unemployment claims showed not quite as bad a number as expected. 

Initial Claims fell 33,000 to 231,000. Mortgage Rates didn’t like this news. 

Continuing Claims only increased by 7,000 and are still very elevated at 1.92M. More people are falling off the claims numbers as they exhaust their benefits or become ineligible. 

Looking Ahead

Tuesday, September 23:

• Chairman Powell gives a speech

Wednesday, September 24:

• New Home Sales

Thursday, September 25:

• Initial and Continuing Claims
• Durable Goods Orders
• Existing Home Sales
• Final Q2 GDP

Friday, September 26:

• PCE