Fed Rate Cuts, Inflation and Mortgage Rates What You Need to Know

How the Fed’s Rate Cut Impacts Mortgage Rates

When the Fed cuts the Federal Funds Rate, it lowers the cost for banks to borrow money from one another. This doesn’t directly affect long-term mortgage rates, which are more influenced by factors like inflation and the demand for bonds, but it does signal a shift in the broader economy.

However, the bigger signal with this recent 50 basis point cut is that the Fed may be wrapping up its program of quantitative tightening (QT). QT was the process of reducing the Fed’s massive balance sheet by selling off bonds and securities. This was intended to pull money out of the economy and help reduce inflation. With QT potentially coming to an end, the Fed is no longer actively draining liquidity from the system, which could give inflation more room to ease up(

Brookings)(Investing.com).

Why Mortgage Rates Could Fall

Mortgage rates, which are largely driven by inflation expectations, could start to drop as inflation cools. This is where the Fed’s end of QT and recent rate cut could work together:

1. Lower Inflation Pressures: The end of QT could reduce inflation pressures. As the Fed stops shrinking its balance sheet, there is more liquidity in the market, which helps stabilize inflation.
2. Oil Prices and Shelter Costs: Inflation has already been easing thanks to falling oil prices and housing costs (shelter). These two key components of inflation have been coming down, and shelter costs, in particular, are expected to continue declining. This is significant because high shelter costs have been one of the main drivers of inflation in recent months.

The Bottom Line

While the Fed’s rate cut doesn’t directly reduce mortgage rates, it can influence inflation trends, and if inflation continues to fall—helped by the end of QT, lower oil prices, and decreasing housing costs—we could see mortgage rates follow suit. Lower inflation gives lenders confidence that the value of future mortgage payments will hold up, which often leads to lower mortgage rates.

For anyone looking to buy or refinance, this could mean that we may soon see more favorable mortgage rates. Keep an eye on inflation trends over the next few months, as they will play a key role in how mortgage rates move.

Feel free to reach out if you’d like to chat about how these economic changes might impact your mortgage or home-buying decisions!