Why Mortgage Rates Rose After the Fed Cut

For the first time this year, the Federal Reserve cut its benchmark Fed Funds Rate by 0.25%, lowering it to a target range of 4% to 4.25%. This move had been widely anticipated, as the Fed attempts to balance lingering inflation with growing concerns over a cooling job market.

Although inflation remains somewhat elevated, the Fed noted that “downside risks to employment have risen.” This shift in tone was key to its decision to begin easing monetary policy. Essentially, the Fed is trying to walk a tightrope – keeping inflation under control without allowing the economy or labor market to slip into recession.

Fed Chair Jerome Powell reinforced the delicate situation, stating that there is “no risk-free path.” The challenge lies in acting soon enough to support the economy, without triggering a resurgence in inflation.

That tension is reflected in the Fed’s latest projections, which reveal a wide range of views among policymakers. Of the nineteen officials, seven expect no additional rate cuts this year (with one even calling for a hike), two anticipate one more quarter-point cut, nine project two more cuts of the same size, and one is forecasting as many as five.

This lack of consensus underscores the uncertainty surrounding the economic outlook and how the Fed might respond as new data comes in.

So why, you might ask, did mortgage rates rise immediately after the Fed cut rates?

This is where market psychology comes into play. Financial markets often move based on expectations, not just actions. Mortgage rates had already fallen significantly in recent weeks – since August 22, when Powell first hinted at a cut. By the time the official announcement came after the Fed’s meeting on September 17, it was already "priced in."

Some investors even reacted by selling once the news became official, leading to a brief bump in mortgage rates. This is a classic example of a “sell the news” response – when markets rally on anticipation, but retreat once the event occurs.

Just a reminder: the Fed Funds Rate is the interest rate banks charge each other for overnight loans. While it doesn’t directly determine mortgage rates, it does influence borrowing costs across the broader economy over time.

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By The MBS Highway Team