Fed rate cuts….don’t mean lower mortgage rates?

I hope you’re having a fantastic week! This week we’re shedding light on a common misconception in our industry—the relationship between Federal Reserve rate cuts and mortgage interest rates.

When the Fed announces a rate cut, many people, including our clients, immediately think that mortgage rates will follow suit and drop. But in reality, there’s almost zero correlation between the two.

Here’s why:

  1. Fed Rate vs. Mortgage Rate – Different Animals: The Federal Reserve controls the federal funds rate, which is the interest rate banks charge each other for overnight loans. It’s primarily used to influence short-term rates, like credit cards and auto loans, not long-term rates like mortgages.
  2. Mortgage Rates Follow the Bond Market: Mortgage rates are more closely tied to the 10-year Treasury Yield. When investors are nervous about the economy, they often move money into safer investments like bonds, which can lower the yield and, in turn, mortgage rates. This movement can happen independently of what the Fed is doing.
  3. What Really Moves Mortgage Rates: Mortgage rates are influenced by inflation, economic growth, and global events. If inflation is expected to rise, mortgage rates tend to go up, regardless of the Fed’s actions. So, even if the Fed cuts rates, mortgage rates might stay the same or even increase.

How You Can Use This Info:

Next time your clients ask why mortgage rates haven’t dropped after a Fed cut, you can confidently explain that it’s not a direct link. Educating them on this difference not only builds trust but also positions you as an expert in the field.

If you have any questions or need more information, feel free to reach out. I’m here to help you and your clients navigate these confusing waters.

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610-432-0900 | info@themichaelmannteam.com

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