Fed Hikes Rates; Rates Drop Sharply. Here’s How That Works

There was some debate as to whether the Federal Reserve would increase the fed funds rate today, although the general consensus was for a 0.25% increase. That’s exactly what the Fed did. Additionally, the markets were (and still are) betting that the Fed cut rates by about 0.75% by the end of the year, but the Fed’s recently released forecasts call for a zero rate cut and end of the year. Slightly higher rates have been shown till date. of 2024.

Despite all this, Treasury yields (a benchmark for mortgage rates) and mortgage rates dropped significantly after the Fed news came out.

Why in the world could this happen?

First, the fed funds rate is not a mortgage rate, nor does it directly affect mortgage rates when the Fed actually hikes or cuts. More importantly, Fed Chair Powell talked about further tightening of lending conditions due to the recent banking drama. This may sound like a simple enough comment, but it carries enormous weight in terms of shaping economic momentum.

Borrowings and loans are important for growth and inflation. If lending slows (fewer loan programs or more restrictive requirements to qualify), this puts additional pressure on inflation. And inflation is the main reason rates remain high.

Long story short, despite a Fed rate hike and a relatively unchanged outlook for 2024, the market saw some signs of a policy pivot in Powell’s comments — some change in the big-picture cycle of economic growth and inflation. Either that, or Powell’s warning on the banks caused investors to fear additional banking issues in the coming days/weeks.

The result was an impressive improvement for the average lender, with 30-year fixed rates falling nearly a quarter point in many cases. It remains to be seen whether this is a temporary sigh of relief or a sign of things to come. That question will likely be determined by the data and whether or not we see additional bank drama in the near future.