WHY INTEREST RATE RISE AFTER FED CUT RATES DOWN BY 50 PT?

When the Fed issues its decision, it changes the federal funds rate, which is what banks charge other banks when lending them money in order to meet their overnight reserve requirements. The fed funds rate has a downstream impact on short-term debt products, like personal loans and credit cards, but its effect on mortgage rates is more ambiguous. However, the actual rate
change could be affected by the following reasons:

I. . Long-term vs. Short-term Rates
The Fed controls short-term interest rates (like the federal funds rate), but mortgage rates are typically influenced by long-term interest rates (such as the yield on the 10-year Treasury
note). While there is often a relationship between short-term and long-term rates, they don’t always move in tandem. If long-term bond yields rise, mortgage rates can rise too, even if the
Fed cuts short-term rates.

II. Inflation Expectations
If markets believe that inflation will remain persistent or increase, long-term interest rates, including mortgage rates, may rise. Investors demand higher yields on long-term bonds to
compensate for the expected erosion of purchasing power due to inflation. Even if the Fed cuts rates, concerns about inflation can push up borrowing costs for homebuyers.

III. Supply and Demand in the Bond Market
Mortgage rates are influenced by the demand for mortgage-backed securities (MBS) and Treasury bonds. If there is less demand for these financial instruments, their prices fall, and
yields (interest rates) rise. Even with a Fed rate cut, if investors are selling bonds in favor of riskier assets or if there’s more issuance of government debt, mortgage rates can increase.

IV. Risk Premium
Mortgage rates also include a risk premium that reflects how lenders view the risk of default on loans. If lenders perceive that the economic environment is risky, such as during a volatile
housing market or a potential recession, they may increase mortgage rates to account for this
risk, even when the Fed cuts rates.

V. Bank Lending Conditions
The cost of funding for banks and financial institutions can be affected by a variety of factors. Even if the Fed cuts rates, banks may face higher costs due to credit conditions, liquidity concerns, or regulations. This can lead to banks charging higher mortgage rates to borrowers.

VI. Government’s Finances
The bond market might also be influenced by factors around the government’s finances. One of them is the upcoming presidential election and rising bets that former President Donald Trump could clinch a win. A recent report from the nonpartisan Committee for a Responsible Federal Budget estimated that under a second Trump presidency, the US national debt could balloon by $7.5 trillion by 2035, compared to an increase of $3.5 trillion under a Harris presidency during
the same time period. The government’s fiscal situation might already be having an impact on mortgage rates. NAR”s Chief economist told reporters from CNN Business said that “We have this large budget deficit, so any time the government has to borrow, borrow and borrow, that just means that there is less mortgage money available for lending into the housing market, all else equal, so maybe the deficit is also hindering some of the mortgage rate decline potential.”

VII. Fed’s Rate Cut as a Signal
Sometimes, a Fed rate cut signals to the markets that the economy might be slowing down. This can create uncertainty and cause investors to expect future inflation or a slowdown in credit availability. Paradoxically, this can push up mortgage rates as investors adjust to the possibility
of slower economic growth or other risks. In summary, mortgage rates are influenced by a range of factors beyond the Fed’s short-term interest rates, including long-term bond yields, inflation expectations, supply and demand for mortgage-backed securities, and the risk environment perceived by lenders. These dynamics can lead to mortgage rates rising even after a Fed rate cut.