As widely expected, the Federal Reserve kept rates steady today. Mortgage rates were also generally stable, but the two have little to do with each other.

Because the Fed was almost certain to “pause” its rate hike campaign today, the pause had no material effect on the bond market. The fed funds rate is an ultra-short-term rate applied to interbank borrowing on an overnight basis. Mortgage rates, on the other hand, are determined by bonds that last several years on average, and in some cases as long as 30 years.

Long term rates and short term rates often do different things. Today is a good enough example with the 2-year Treasury yield down 0.015% and the 10-year Treasury yield down 0.037%. However, this was not destined to happen at the time of the Fed’s announcement, as the Fed’s dot plot (a chart released 4 times a year that shows the Fed’s best guess on the path of the fed funds rate over the coming year) The median outlook suggested that two more rate hikes would be needed this year.

Upgraded DOTS spooked the bond market for a while. At a regularly scheduled press conference 30 minutes later, Fed Chair Powell reminded the market that the DOTS are only a best guess of how Fed members think conditions will unfold. If conditions do not unfold in this way, two more hikes will not happen. Furthermore, Powell explicitly stated that nothing has been decided about future meetings and that the word “skip” is not the correct way to refer to the absence of a rate hike today.

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In other words, if the economy and inflation play ball, the Fed won’t need to raise rates again during this cycle. This is something that lies at the beginning of a longer term trend towards lower rates. This is also the kind of thing that will still take a few months to confirm, given that the data suggests less inflation and a more downbeat economy.

Mortgage rates averaged 7% today (they were already pretty close yesterday) before falling back into the high 6s by the end of the day. Rates changing at midday are not an everyday occurrence, but they are common when the bond market makes big moves during business hours.


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