50 points!
What the Fed’s move implies for mortgage rates
On Wednesday, the Fed made a long-awaited and much-anticipated cut to its target interest rate (the federal funds rate), dropping its target range by 50 “basis points”, from 5.25 to 4.75.1
No doubt there was much rejoicing across various corners of the macroeconomic landscape, especially for those in the housing sector. The stock market was happy, too, well at least at first (rising quickly after the announcement, only to decline again by the of the day. (Though as of today (Friday), the market is up again—like an on-and-off-again amorous partner, the Market never really knows what it wants.)
For the record, Macrosight was pretty surprised by the 50-point cut. At the end of last week’s post, this blog even speculated that the Fed might not change rates at all. Clearly, Jerome Powell and company are perhaps more concerned about the job market data than this macroeconomist assumed.
Either way, we now live in a world where the Fed just cut rates by a half percent—the biggest cut they have executed since the winter of 2020. There is a lot one can say about the Fed’s 50-point rate cut, but for this post we’ll focus on one thing—the implication for the 30-year mortgage rate. Does this mean we will see the mortgage rate drop?
Let’s take a look at some data.
The Mortgage Rate
Figure 1 displays the 30-year mortgage rate for the United States at the weekly frequency since January of 2020.
After remaining historically low for 2020 and 2021 (the lowest ever, as can be seen here), the 30-year mortgage started increasing at the beginning of 2022. In fact, it started doing so well before the Federal Reserve decided to start raising its target for the federal funds rate (which can be seen here). That began at the end of March 2022 and did not stop until very late-July/early-August of 2023 (that stretch of time is shaded pink on Figure 1).
Over that time period the 30-year mortgage rate generally went up, though with some weeks of decline. Said mortgage rate peaked at 7.8 percent in late-October 2023.
A Fed-Mortgage Rate connection?
It is logical to link the increases in the Fed’s target interest rate from March 2022 to August 2023 with the increase in the 30-year mortgage rate over that time period. The assumption of macroeconomists is that when the Federal funds rate goes up, so too does every other rate.
However, it is likely the 30-year mortgage rate would have increased anyway—again, the 30-year rate started increasing before the Fed took any action in March 2022. The reason for that is because of inflation.
By early 2022, the CPI rate of inflation had already been increasing for a few months (the increases really started to accelerate in spring of 2021, as can been seen in Figure 1 of this post). Interest rates associated with long-term contracts like 30-year mortgages imbed in them an “inflation premium.” If inflation accelerates, that gets “built into” those long-term rates.2
Notice also that since the high of 7.79 percent in late-October of last year, the mortgage rate fell relatively quickly, inched back up, and then trended downward once again. Hence to answer the question from above—will the mortgage rate drop?—the mortgage rate has already been dropping!
Let’s take a closer look at that already-been-happening drop.
2024
Figure 2 focuses on the 30-year mortgage rate since the beginning of this year.
So far 2024 has been a tale of two mortgage rates. For the first four months of this year, the rate increased. Since May, however, the rate has declined by a full percentage point. Not coincidentally, the CPI rate of inflation has been stable in 2024 (see this fact again here). With disinflation, it is not surprising to see the 30-year mortgage rate come down.
So, what does this mean for the mortgage rate going forward? As long as inflation remains stable, and continues to converge back to sub-3.0 percent, the mortgage rate should continue to inch down. With or without a Fed cut this week, the downward trend of the past few months would have likely continued as long as inflation continued to decline the next few months.
However, the 50-point cut executed by the Fed this week, I would guess, will give the mortgage rate a kick and speed up the decline we have observed the past four months.
Technically the Fed specifies a range for the target. The target range fell from 5.25 - 5.50, to 4.75-5.00 percent.
Mortgage interests are determined by a number of factors including the supply and demand for housing and the supply and demand for mortgage financing. On top of those forces, expectations for inflation help determine the mortgage rate.