Why Fed rate cuts are not a solution to high mortgage rates
Mortgage interest rates have had a bad month. Actually three bad years.
On November 7, the Federal Reserve implemented one 0.25% reduction of the Federal Funds Rate, the second reduction in more than four years. Potential home buyers are looking for a bright spot in the housing market. But experts don’t expect dramatically lower rates before the end of the year.
After the Fed’s 0.5% rate cut in September, mortgage rates went up, not down. Although the central bank’s policy decisions and economic outlook influence credit markets, the Fed does not directly set mortgage rates. Mortgage rates are highly volatile and respond to multiple factors, such as market expectations, inflation and employment data. For example, after rates hit a two-year low in early September, a surprisingly strong employment report sent rates back up nearly 7%, where they remain today.
Extreme interest rate volatility due to election uncertainty made matters worse. Even though the results of the presidential election are now known, mortgage rates have taken a big hit, and relief won’t come overnight.
The long-term view on mortgage interest rates
In recent weeks, investors in bond markets have panicked about how the next administration’s economic policies could increase government spending and put upward pressure on interest rates. Skepticism about the direction of the economy (for both candidates) is a major reason why 10-year bond yields rose last month. Yields on government bonds and ten-year mortgages are highly correlated and tend to move in parallel.
“Many conservative Wall Street players have floated the idea that with tariffs, President Trump would have higher budget deficits and higher inflation,” the spokesperson said Logan Mohtashamichief analyst at HousingWire. That investor outlook helped push up short-term mortgage rates. Rising inflation could prompt the Fed to keep rates high for longer, delaying further rate cuts in 2025.
In the long term, however, multiple future cuts and weaker economic data should cause mortgage rates to fall. There is usually a lag between when the central bank starts cutting rates and when mortgage rates are on a consistent downward trend, according to Jeff WenigerCFA and head of equity strategy at WisdomTree Asset Management. It could take two to five years for mortgage rates to reflect the full effects of the Fed cuts.
Experts also don’t know the new “low” for mortgage rates – it could be 5% or 4% – but it all depends on the evolving economic outlook. Either way, a return to the 2-3% rates of the pandemic era is unlikely.
Read more: CNET’s weekly mortgage predictions
Don’t wait for the lowest mortgage interest rate
Ultimately, it is impossible to predict the future of the housing market. Anything can shake up the economy, from another major crisis to a surprising rise in inflation. Without a crystal ball, it is best to keep an eye on daily mortgage interest rate movements.
As mortgage rates begin to fall, some homebuyers will jump into the market, while others will opt for even lower rates. Waiting too long can also be risky. Last month, mortgage interest rates seemed to be heading towards 6%, but the course soon reversed. Now they are almost 7% again.
“It’s impossible to guarantee what mortgage rates will do, so you have to take advantage of the opportunities that arise,” he says Jeb Smitha CNET Money expert and broker with more than 20 years of experience.
You shouldn’t rush into buying a home (even if interest rates drop) if it doesn’t make sense for your budget or lifestyle. Taking extra time to build your credit score and setting aside cash for a larger down payment can save you money on your future mortgage in the long run.
