Fed cuts rates and mortgage rates went…UP??

Fed Cuts Rates by 0.25%

The Federal Reserve (Fed) met on Tuesday and Wednesday of this week, and as expected, cut its interest rate target by 0.25%. This will immediately cause many lines of credit, like HELOCs and credit cards, to lower their interest rates. What it doesn’t do is lower mortgage rates. In fact, mortgage rates went up after the press conference.

How Mortgage Rates Are Actually Set

Mortgage rates are created by the supply and demand for Mortgage-Backed Securities (MBS’s). These securities are bundles of mortgages that are chopped up into smaller pieces and then sold on the market to primarily institutional investors. If there is greater demand or less supply, MBS values increase, resulting in lower yields/rates. If the demand declines or there is a greater supply, the opposite occurs. 

Powell’s Hawkish Tone Spooks Markets

Hawkish (anti-rate cut/more restrictive) comments caused selling in stocks, bonds, and MBS, and pushed rates up. During the press conference after the announcements, Chairman Powell said that the next meeting’s expected rate cut, on December 10, was “not a foregone conclusion – far from it.”  This tone spooked the markets, causing an immediate sell-off. Listening to more of his answers, it is clear that the Fed may not cut rates again in December, unless they can get additional economic reporting that they have missed during the government shutdown. 

Fed Ends Balance Sheet Runoff

One bright spot was that the Fed said it would end its balance sheet runoff. The Fed owns significant holdings of US Treasury debt and MBS. Think of these as loans, like car loans or mortgages, in that they have a finite end date. When that date is reached, the debt is gone and the money “runs off” the balance sheet. Currently, the Fed has slowed the pace at which it allows assets to run off its balance sheet. They would take the proceeds and reinvest them back into newer US Treasuries and MBS. This created demand and helped to push rates down. Because they are indicating they will stop all runoff, that means they will take all the proceeds and purchase even more debt/bonds. This should be great news for rates.

Market Disappointed by “Bills” Focus

Unfortunately, Powell added one extra word to the announcement of a pause in run-off. He said they would reinvest into “Bills” meaning Treasury Bills. These are defined as Treasury debts that have a maturity less than 1 year. Markets were hoping for investments in the longer end of the market, such as 10-year and 30-year Treasuries, which would have pushed those rates down. Fortunately, US Treasury Secretary Scott Bessent has a plan and can help us out. He can direct the treasury to issue short-term bills versus longer-term bonds. This would reduce the supply of those bonds and keep their yields/rates lower, which would also help mortgage rates. 

Looking Ahead: Next Week’s Economic Calendar

• Monday, (November 3): Institute for Supply Management (ISM) Manufacturing Index
• Tuesday, (November 4): JOLTs (Not happening due to shutdown)
• Wednesday, (November 5): ADP Employment Change
• Thursday, (November 6): Initial and Continuing Jobless Claims (Not happening due to shutdown)
• Friday, (November 7): October Jobs Report (Not happening due to shutdown)