The Federal Reserve will cut rates by 0.25% today, which is all but guaranteed.
The typical observer might think this could help mortgage rates. This would be a much needed relief after an absolute bloodbath for rates yesterday following a resounding win for Trump.
But any such hope would be in vain. Mortgage rates will likely climb after the Fed announcement.
There are a couple reasons for this counterintuitive move.
First, the rate cut has been baked into mortgage rates for months. In fact, at one point, markets expected bigger cuts. By the Fed’s own projections, its key interest rate may have dropped by 0.50% today. A cut of “only” 0.25% today is almost a disappointing one to markets.
One-Two Punch for Mortgage Rates
But the bigger factor affecting rates is the decisive election win by Trump. He is seen by markets as 1) the pro-business candidate; 2) the more inflationary one.
Both attributes are bad for mortgage rates.
Pro-Business
Trump is seen by markets as the president who will usher in good times for businesses, say NPR and countless other publications.
Trump plans to cut corporate taxes and deregulate some industries, potentially resulting in a hot economy and rising stock market. The Dow Jones Industrial Average was up an eye-popping 3.5% yesterday. A strong economy would benefit American workers in many ways.
But it would also reduce demand for mortgage bonds, which determine mortgage rates. As demand falls, interest rates on those bonds must rise, resulting in higher mortgage rates.
Inflationary
But inflation expectations are the second gut punch to mortgage rates after Donald Trump won another four years in the White House.
A strong economy can result in inflation. Companies vie for workers with larger and larger salaries, signing bonuses, and benefits. Companies pass costs on to consumers, driving up prices for goods and services, which is another way of saying “inflation.”
Trump has also proposed a 60% tariff on Chinese goods and promised mass deportations (which would tighten the job market, see above).
Inflation is bad for mortgage rates because investors can lose money buying mortgage bonds.
Investors who bought billions of 3% mortgages in 2021 essentially lost their shirts when inflation rose to 8% in 2022. Their investment had a real return of -5% that year. To avoid this situation, investors won’t buy mortgage bonds unless they think the interest rate on those bonds will be higher than inflation over the next seven to 10 years.
Can the Fed Help Mortgage Rates Under Trump?
The Fed responds to the economy. It won’t cut rates under rising inflation.
The group has little reason to keep cutting if job creation remains strong and inflation ticks up. That move would be against their mandate to keep inflation near 2%.
The Fed can’t randomly issue cuts to help mortgage shoppers. Besides, the Fed doesn’t control mortgage rates. It influences them at best.
The Fed is an independent body. Though it faced pressure to cut rates under the last Trump presidency, they are under no obligation to do so. It will continue to prioritize a balanced economy.
What Should Mortgage Shoppers Do?
The best move from mortgage shoppers is to accept the current market conditions for what they are. Don’t assume rates will drop: rates continued to rise for two years after the 2016 Trump election win.
If a rate and payment works for you, go ahead and buy or refinance. If markets are right, your job prospects and pay might just improve soon.
