Today was Fed day, and when Jerome Powell speaks, we make the Weekly Market Update all about mortgage rates.
Earlier today, the Fed announced a 0.25% cut to the benchmark federal funds rate—the third consecutive reduction this year. With these cuts totaling a full percentage point in 2024, you might be wondering: Why aren’t mortgage rates dropping too?
1. The Market Already Priced It In
The main reason mortgage rates didn’t budge is simple: lenders saw this coming. The Fed signaled months ago that a 0.25% cut was likely in December, and the market “priced it in.” This means lenders adjusted their rates in anticipation of the move, treating it as if it had already happened.
When the Fed’s actions align with expectations, there’s little immediate effect on mortgage rates. Surprises—like unexpected rate hikes or cuts—are what typically cause noticeable shifts.
2. Mortgage Rates Are Influenced by More Than the Fed
While the federal funds rate sets the tone, it’s not the sole driver of mortgage rates. Other factors play a significant role, including:
- Job Market Conditions: Strong employment typically keeps rates higher, as it signals a stable economy.
- Inflation Trends: Declining inflation generally supports lower rates and right now inflation is staying stubbornly strong.
- The 10-Year Treasury Yield: Mortgage rates closely follow the trajectory of the 10-year Treasury bond, which reflects broader market sentiment.
These variables, which also guide the Fed’s decisions, help explain why mortgage rates don’t always move in lockstep with rate cuts.
3. The Good News: Rates Are Trending Down
Despite today’s muted response, we’re now firmly in a declining interest rate environment. Powell and other Fed officials have signalled at least two more rate cuts in 2025, reinforcing the message that rates are moving in the right direction—albeit more slowly than we’d like.
What’s Next?
Expect mortgage rates to gradually inch lower as we move into the New Year. The next big milestone will be the Fed’s January 29th meeting, where more clarity on the 2025 rate trajectory will likely emerge.
In the meantime, the takeaway is clear: while today’s rate cut didn’t provide an immediate drop in mortgage rates, the long-term outlook is improving.
