Mortgage rates are heading higher even after interest rate cut by the Fed

The Federal Reserve has cut interest rates again- this time by three quarters of a percentage point. But will not help in reducing the mortgage rates? It may happen otherwise and home loan rates may rather go up. In January when he Fed cut the interest rates, the 30-year fixed mortgage rate jumped to 6.4% from 5.6%.The Fed can control the short-term fed fund rates but it cannot control the long-term mortgage rates. Long-term mortgage rates depend on 10-year Treasury yield and these are controlled by bond traders.

Let’s see how long-term bond rates are affected. The Fed cuts the short-term interest rates so as to encourage investment and hiring by corporations. Economic growth due to more investment can lead to inflation. In such situation, the bond traders, who control the long-term mortgage rates, demands higher interest rates for their long-term bonds. Increasing the bond yield drives up the mortgage rate.

So, if you see there is a long disconnect between the fixed mortgage rates and the fed funds.

The Fed started cutting interest rate in last September. It reduced the interest rate to 2.25% from 5.25%.

If you are having an ARM, then it may be beneficial for you. You may have to pay a lesser rate due to the rate cuts by the Fed. This happens because Adjustable Rate Mortgage depends on indexes like one-year Treasury yield and the Libor (London Interbank Offered Rate) and these indexes move with the Fed fund rate.