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How Fed Actions Impact Mortgage Rates
It’s essential to understand that when the Federal Reserve adjusts rates, they are not directly changing mortgage rates. Instead, they alter the overnight rate, which affects the cost of short-term borrowing between banks. This shift directly impacts rates for things like credit cards, car loans, and personal or business loans. However, the Fed’s actions have an indirect influence on mortgage rates.
The chart referenced compares the U.S. Treasury Yield Curve from September 20, 2024 (blue line) to September 20, 2020 (red line). The left side of the curve represents short-term Treasuries, like one- and two-month bonds, while the right side shows longer-term bonds, including the 10-, 20-, and 30-year Treasuries.
As a result of the Fed’s recent moves, we expect the yield curve to steepen—similar to how it appeared in 2020 (red line). Currently, the yield curve is inverted (blue line), meaning short-term rates are higher than long-term ones, which is unusual. Typically, long-term investments should offer higher returns due to the extended commitment. However, as the Fed lowers rates, short-term yields will drop faster than long-term ones, causing the curve to steepen. This shift is likely to create a more significant difference between Adjustable-Rate Mortgages (ARMs) and 30-Year Fixed rates.
What Does This Mean for 30-Year Fixed Mortgage Rates?
The direction of mortgage rates depends largely on how investors perceive the overall economy. Historically, there have been instances where Fed rate cuts have actually caused mortgage rates to rise due to inflation concerns. Why? Lower interest rates leave consumers with more money to spend, potentially driving up demand and prices. Similarly, businesses can borrow more affordably, stimulating economic activity.
However, the current situation is unique. The Fed has raised rates to such high levels for so long that even a significant series of cuts may still leave rates restrictive enough to prevent excessive inflation. Importantly, the Fed has also made it clear that they won’t lower rates until they are confident inflation is under control. Given their decision to cut on September 18th, it appears they believe inflation is cooling, which is a key factor influencing long-term interest rates, such as mortgage rates.
According to the Fed’s Summary of Economic Projections (SEP), they are anticipating another 0.5% rate cut this year, followed by a full 1% reduction in 2025. They forecast inflation to drop to 2.2% next year, which is positive news for mortgage rates. Additionally, they expect unemployment to rise to 4.4%, another factor that could help bring mortgage rates down. If the economy faces recession-like conditions, which the Fed is concerned about, mortgage rates could decrease further.
The Bottom Line
Mortgage rates are likely to trend lower, but this will not happen overnight, and the decline may not be as steep as some anticipate. The path forward will depend heavily on broader economic indicators, including inflation and unemployment. While rates are expected to come down, it’s important to stay realistic about the pace of the decline.
Renee H. Kraft Luxury Top performing Hawaii State Broker born and raised on the island of Oahu named one of Hawaii State’s very best Realtors. She brings exceptional service to her clientele. Licensed professional Realtor in Hawaii Real Estate since 1992. She has the experience and tenacity to market effectively, negotiate, and focus with attention to detail every step of the way. Educated 7th – 12th grades at the La Pietra Hawaii School for Girls and the University of Hawaii Manoa campus with a B.A. in Psychology. She strives to continually keep up on the Hawaii economic forecasts and daily market activity. Technology driven Renee understands the importance of keeping her clientele in the loop on current market availablility and knowing the market inventory is 100% key to get her clients what they want. Extraordinary exceptional homes, estates, condominiums, and vacant land are her specialty. Integrity and honesty are just a fraction of what Renee shares with her clients and a very strong work ethic. Putting the client’s needs first utilizing the range of experience and knowledge, combined with a a huge amount of Aloha gives her great satisfaction that she can help her clients make sound and profitable real estate investments. Member Rotary Club of Kona -Accredited Buyers Representative (ABR) -Sellers Representation Specialist (SRS) -Graduate Realtors Instutute (GRI) -Resort and Second Home Property Specialist RSPS).
