The Federal Reserve on Wednesday cut interest rates for the third time in 2024. Despite the move, mortgage rates increased.
The 30-year fixed rate mortgage spiked to 6.72% for the week ending Dec. 19, a day after the Fed meeting, according to Freddie Mac data via the Fed. That’s up from 6.60% from a week prior.
At an intraday level, the 30-year fixed rate mortgage increased to 7.13% on Wednesday, up from 6.92% the day before, per Mortgage News Daily. It notched up to 7.14% on Thursday.
The Fed’s latest adjustment lowered its benchmark rate by 0.25 basis points. The central bank has cut the federal funds rate by a full percentage point altogether this year.
While interest rates moderately declined after the Fed’s first rate cut, borrowing costs have broadly climbed since late September.
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To understand that disconnect, it’s important to remember that mortgage rates closely follow the Treasury yields and are only slightly impacted by the federal funds rate. Mortgage rates climbed in November as the bond market reacted to Donald Trump’s election win.
The Fed also indicated fewer rate cuts are in store for 2025, which may have sparked volatility in the markets, experts say.
“The market is just responding to the tone of the Fed’s message,” said Jessica Lautz, deputy chief economist at the National Association of Realtors.
Here’s why rates jumped, experts say.
The Fed ‘spooked the bond market’
The Fed’s so-called “dot plot” this week showed fewer signs of more rate cuts in 2025, according to Melissa Cohn, regional vice president of William Raveis Mortgage in New York.
The dot plot, which indicates individual members’ expectations for rates, showed officials see their benchmark lending rate falling to 3.9% by the end of 2025, equal to target range of 3.75% to 4%. After the latest rate cut, it’s currently at 4.25%-4.5%.
When the Fed made its first rate cut in September, it had projected four quarter-point cuts, or a full percentage point reduction, for 2025.
“That, in conjunction with Trump’s desired policies on tariffs, immigration and tax cuts — which are all inflationary — spooked the bond market,” Cohn said.
Mortgage rates also tend to move in anticipation of what the Fed is going to do in its upcoming meetings, said Jacob Channel, a senior economist at LendingTree.
For instance, mortgage rates declined this summer and early fall, in anticipation of the first interest rate cut since March 2020.
Therefore, mortgage rates might not do “anything particularly dramatic” in the face of the Fed’s actual meeting, he said.