Why Mortgage Rates Spiked After the Fed Cut Rates - and What Comes Next

Why did mortgage rates suddenly spike after the Fed cut rates? That’s everyone’s question after yesterday’s Fed meeting. Many people assume that when the Federal Reserve lowers interest rates, mortgage rates automatically drop. That’s not always true. The Fed controls short-term rates, like what banks charge each other overnight. Mortgage rates, however, follow long-term rates, mainly the 10-year Treasury yield. When the Fed cut rates today, investors expected more cuts ahead. But during the press conference, the Fed hinted that future cuts aren’t guaranteed. That uncertainty made investors nervous, so they sold bonds. When bonds are sold, their yields rise - and mortgage rates rise with them.

A rate cut can also signal economic stimulus, which sometimes means higher inflation later. Investors dislike inflation because it reduces bond returns, so they demand higher yields. Higher yields lead to higher mortgage rates. So even though the Fed lowered its rate, mortgage rates spiked because the market was reacting to uncertainty about what’s next.

What happens now? Historically, after this kind of shock, rates often settle down over the next few weeks as long as inflation data looks good and investors believe more cuts are coming. If Treasury yields drift lower, mortgage rates should follow.

My expectation: Today’s spike is temporary. Once the market absorbs the Fed’s message and uncertainty fades, I expect mortgage rates to trend downward in the coming weeks, provided Treasury yields move lower.

Our Expectation: Today’s spike is temporary. Once the market absorbs the Fed’s message and uncertainty fades, we

expect mortgage rates to trend downward in the coming weeks, provided Treasury yields move lower.