31 Oct Fed Rate Cut Helps Mortgage Interest Rates
Yesterday’s Federal Reserve rate cut has been positively accepted by bond investors, which is good news for the near-term direction of mortgage interest rates. Given that rates moved higher following the last Fed rate cut, it was unknown how the market would take to another cut. Since Fed rate cuts are considered inflationary, we often see mortgage interest rates move higher when the Fed cuts. With inflation levels remaining tame, the bond market is taking the cut well. It’s important to remember that higher levels of inflation reduce the “real” rate of return bond holders receive. Therefore, bond investors demand a higher rate of return in times of higher levels of inflation. That is why inflation is one of the primary determining factors that impact mortgage interest rates.
An important part of yesterday’s Fed rate cut was found in the statements made by Fed Chairman Jerome Powell’s that followed the rate cut announcement. The prior language stated, “The Fed will act as appropriate to sustain the expansion.” Yesterday’s language was changed to, “Will assess the appropriate path of the Fed Funds rate.” This is essentially warning the market that continued rate cuts aren’t certain; they will be data dependent. Therefore, unless we see the labor market or US economy in general stumble, Fed rates will likely hold at current levels. This is not good news for the US stock market and is helping improve mortgage interest rates.
With the bond market improving, we have seen mortgage interest rate pricing come down a little in the past 24 hours. If this rally continues, we can expect to see mortgage interest rates continue to improve. I believe that tomorrow’s Bureau of Labor Statistics (BLS) report will greatly influence the longer-term outcome. I believe the report will show a relatively low level of new job creations, which would help improve rates even more. However, there is no guarantee of this. So floating could bring more risk than some are comfortable taking. If you choose to float, do so carefully and be prepared to lock.