I attended a Real Estate and Mortgage Professionals Mixer and Presentation last week for the San Francisco Women’s Council of Realtors, but I was sitting in the audience and was not on stage.

A friend of mine was on stage and asked me during his presentation the trick question: When did the Fed last cut rates this year?

It was a trick question because it was in December last year, not this year.

The Federal Reserve’s last interest rate cut was on December 18, 2024, when they lowered the target range for the federal funds rate by 25 basis points to 4.25%-4.50%. This marked the third consecutive rate cut in 2024, following a 50-basis point cut in September and a 25 basis point cut in November. 

Here’s a breakdown of the Fed’s recent rate cuts:

  • September 18, 2024: A 50-basis-point cut, the first in over four years. 
  • November 7, 2024: A 25-basis-point cut. 
  • December 18, 2024: A 25-basis-point cut, bringing the target range to 4.25%-4.50%. Please visit my BLOG regarding a more detailed answer.

Yes, the last Fed Rate Cut was in December last year or about 9 months ago.

Why did I provide this context for you?

I am leading up to the question recently posed: WHAT WILL HAPPEN TO MORTGAGE RATES AFTER THE FED MEETS?

Borrowers, real estate agents and even other loan professionals have been asking me this lately.

You might not be happy with my answer I gave them.

If history repeats itself (As what happened in December 2024) and the Bond Trading Mantra BUY THE RUMOR SELL THE FACT holds true in a few weeks, mortgage rates may actually rise.

https://money.usnews.com/loans/mortgages/articles/the-fed-has-been-cutting-rates-why-are-mortgage-rates-higher

I asked experts, despite having been involved with mortgages since 1984. No, it is not possible to state an exact number of times the Treasury market has anticipated Federal Reserve rate movements. The market constantly prices in expectations for future Fed policy, making this a continuous, real-time process rather than a series of discrete events. However, financial history shows many instances where the Treasury market’s moves signaled a future shift in Fed policy. 

Before I offer the breakdown of the dynamic between the Treasury market and the Fed, what does BUY THE RUMOR SELL THE FACT even mean?

You may have noticed mortgage interest rates improving the last few months for both Residential and Commercial Real Estate.

It is easier to see government bonds’ rates as you can look these up anytime you want.

Residential Mortgage Bonds (often FNMA) are harder to look up and can be deceiving.

FNMA posts a National Rate on the St. Louis Fed Website. Here is the link to view it going back several decades:

https://fred.stlouisfed.org/series/MORTGAGE30US/

Many times, looking for the mortgage bond rates, you may only see a sales price for that mortgage bond coupon, versus an actual interest rate.

I am currently viewing the 6% coupon which closed today at 102.16 and has been close to this level for the last month or two.

5 months ago, or so it was almost 2 points below this.

Bond Traders buy these bonds which makes the prices go up and rates go down.

As these traders place their “bets’ so to speak, it is based on the belief that the Fed will cut rates mid this month. Hence BUY THE RUMOR.

Assuming these traders want to get company bonuses for their performance (aka trading profits for their company), what do you expect they will do AFTER the Fed announces a Fed rate Cut?

You guessed it.

They will sell their positions in these bonds, fill in the confirmations on their trading tickets, calculate their “winnings” aka company profits and sit back to see what else happens afterwards.

This happened last December.

Loan officers like me and others around the country had to tell our clients that current rates were now higher.

I was asked funny questions like “Do you know what you are saying? Did you just get into the loan business?”, “Have you been to the eye doctor lately to get your vision checked?” or “What were you drinking for breakfast this morning?”

Later, these jokesters, aka former clients, realized that nobody was honestly quoting lower interest rates after this Fed Rate Cut.

Here is another long-winded, but technical explanation that was provided to me to share with you about what I see happening currently and seems to be a repeat of the past.

The market leads, the Fed follows

While the Fed directly sets the federal funds rate for overnight bank lending, longer-term Treasury yields reflect the market’s collective judgment on the economy’s future. The market is not beholden to the Fed’s pronouncements and will often move based on data and sentiment ahead of a Federal Open Market Committee (FOMC) meeting. 

  • The 2022 rate hike cycle: Long before the Fed began raising its policy rate in 2022 to combat inflation, Treasury yields had already started to climb. The bond market was pricing in the expectation that the Fed would need to act, forcing the central bank’s hand.
  • The 2005 conundrum: In the mid-2000s, then-Fed Chair Alan Greenspan noted a “conundrum” where long-term Treasury yields fell even as the Fed raised short-term rates. This was widely attributed to market forces, including demand from foreign central banks, that counteracted the Fed’s actions. 

Signals from the yield curve

The Treasury yield curve, which plots the yields of Treasury securities across different maturities, is a key indicator of market expectations about the future path of interest rates and the economy. 

  • Inverted yield curve: When yields on shorter-term bonds rise above those of longer-term bonds, the yield curve is said to be “inverted.” This is a classic market signal that investors expect a future slowdown in economic growth, which would likely compel the Fed to lower rates. This inversion preceded recessions throughout history.
  • Flattening yield curve: A flattening yield curve, where short-term yields rise faster than long-term ones, often indicates that investors expect the Fed to hike rates to slow the economy and fight inflation. 

Market and Fed projections are often wrong

Historical analysis shows that both market predictions and the Fed’s own forecasts for the future path of interest rates are frequently inaccurate. 

  • Market bias: The market often exhibits a “mean reversion” bias, tending to predict that rates will move back toward their long-term average, even when economic fundamentals suggest a different path.
  • Forecasting errors: A 2011 study by the Federal Reserve Bank of New York found that forecasters tend to over-predict the federal funds rate in easing cycles and under-predict it in tightening cycles. 

Why is there constant negotiation?

The market and the Fed are in constant, dynamic interplay. 

  • The market, comprising millions of investors, reacts to real-time economic data, inflation signals, and geopolitical events.
  • The Fed, in turn, watches market conditions closely and adjusts its policy accordingly, often trying to guide market expectations through its communications. 

 LAST QUESTION (or so) IF YOU HAVE READ THIS FAR:

WHAT AM I SUGGESTING TO CLIENTS AT THIS POINT IN TIME?

LOCK your current loan if you are floating and are planning to close your transaction in the next month or so.

Can interest rates go lower?

Of course, anything is possible, but how would you feel if your floating mortgage rate went up (as I may be correct) and you did not lock ahead of time?

Posted in blog, Market Predictions