Mortgage rates have seen a notable increase despite the Federal Reserve's recent decision to cut interest rates. This summer and early fall, mortgage rates declined in anticipation of the first interest rate cut since March 2020. However, the 30-year fixed-rate mortgage jumped to 7.13% on Wednesday, up from 6.92% the previous day. This surge occurred even though the Fed lowered its benchmark rate by 0.25 percentage points.
The relationship between mortgage rates and Treasury yields is a key factor in this development. Mortgage rates closely follow Treasury yields and are only slightly influenced by the federal funds rate. Jessica Lautz, deputy chief economist at the National Association of Realtors, commented on the market's reaction to the Fed's communication.
"The market is just responding to the tone of the Fed's message." – Jessica Lautz, deputy chief economist at the National Association of Realtors.
The Fed's dot plot indicated that officials anticipate their benchmark lending rate to fall to 3.9% by the end of 2025. However, the 30-year fixed mortgage rate spiked to 6.72% for the week ending December 19, just one day after a Fed meeting. This instability reflects the market's anticipation of future Fed actions, as explained by Jacob Channel, a senior economist at LendingTree.
In September, when the Fed enacted its first rate cut, it projected four quarter-point cuts for 2025. Despite this forecast, mortgage rates have climbed since late September. The Fed's indication of fewer rate cuts for 2025 has contributed to market volatility, with Melissa Cohn, regional vice president of William Raveis Mortgage in New York, noting a lack of signals for more cuts in 2025.
"That, in conjunction with Trump's desired policies on tariffs, immigration and tax cuts — which are all inflationary — spooked the bond market." – Melissa Cohn, regional vice president of William Raveis Mortgage in New York.
The bond market's reaction to Donald Trump's election win in November also played a role in rising mortgage rates. Interest rates initially declined following the Fed's rate cut but have generally increased since late September. Overall, the central bank has reduced the federal funds rate by a full percentage point throughout this year.