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Unpacking the Rise in Mortgage Rates Despite Fed Rate Cuts: What’s Really Driving the Surge?

Unpacking the Rise in Mortgage Rates Despite Fed Rate Cuts: What’s Really Driving the Surge?

Despite the Federal Reserve’s recent rate cuts, mortgage rates have unexpectedly surged to 7%, leaving many wondering why. From April to September 2024, mortgage rates had fallen to an average of 6.11%, driven by weaker job reports and concerns of a potential recession. As economic data started signaling a softening labor market and weaker consumer spending, fears of a downturn led to falling bond yields, which typically help lower mortgage rates.

However, by the fall of 2024, an improved labor market and persistent inflation above the Fed’s 2% target reversed this trend. Fading recession fears triggered a sell-off in bonds and mortgage-backed securities, causing bond yields to rise sharply. Since mortgage rates are closely tied to the 10-year Treasury yield, this bond market reaction pushed mortgage rates back up to 7%.

Adding to the complexity is the impact of fiscal policy uncertainty. With a divided government and growing concerns about future government borrowing, markets anticipate higher deficits, which could further drive up Treasury yields. When the government borrows more, it often leads to higher yields on Treasury bonds, putting upward pressure on long-term mortgage rates as well. Inflation concerns linked to potential fiscal policies in 2025 also drive these yields higher.

Mortgage rates remain elevated as financial markets navigate short-term economic performance and long-term fiscal expectations. If inflation begins to fall in line with the Fed’s targets and employment data weakens, mortgage rates could decline again. But for now, robust labor market data, high inflation, and fiscal policy uncertainty keep mortgage rates higher than anticipated.

In conclusion, mortgage rates are influenced by a delicate balance of economic performance, inflation trends, bond yields, and fiscal policy. While the Fed has taken steps to reduce borrowing costs, broader market forces are driving mortgage rates up.

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