Mortgage rates are surging ahead of the Fed’s expected rate cut. What gives?
Mortgage rates are rising sharply even though the Federal Reserve is expected to cut interest rates later this week.
That’s contrary to how rates traditionally have moved ahead of anticipated Fed cuts. Typically when the Fed is expected to keep cutting rates, financial markets factor in the move, and traders then push the 10-year Treasury down. When the 10-year moves downward, the 30-year mortgage rate often falls in tandem.
But on Monday, the 30-year mortgage rate jumped nine basis points to 6.36%, the highest level in two weeks, according to Mortgage News Daily.
That increase comes in spite of the high likelihood of the Fed cutting rates at its meeting on Wednesday.
The 10-year, and by extension the 30-year, are “not behaving as [they] traditionally would,” Jeffrey Ruben, president at WSFS Home Lending, a Northeast-based mortgage lender, told MarketWatch.
The 10-year Treasury jumped to 4.17% as of 3:30 p.m. Eastern on Monday, with the 30-year rising in tandem.
The increases may be due to a couple of key reasons.
Ruben said that the bond market may be trying to assess the Fed’s next move following the December rate cut, with inflation potentially still being a problem for the U.S. economy.
Traders may also be factoring in the likelihood that the Fed will stop cutting rates for the time being after December, unless the economy takes a sharp turn.
Financial markets expect the Fed to stop cutting when its interest rate falls closer to 3%, which is seen as a normal rate. Looking at the Fed’s longer-term “dot plot” forecast for where rates could be headed, we are getting closer to that 3% range, Robert Tipp, head of global bonds at PGIM Fixed Income, told MarketWatch.
Right before the Wednesday meeting, the Fed’s effective rate was 3.88%, according to the Board of Governors of the Federal Reserve System.
