If the Fed cuts interest rates, why do mortgages and business loans cost more?

While the Federal Reserve has cut its short-term interest rate target by three-quarters of a percentage point since mid-September, rates on 30-year fixed-rate mortgages have risen almost as much over that period, most recently averaging around 6.8%. , higher than when the Fed began cutting interest rates, according to Freddie Mac, the home lending giant.

Small business loan rates have also risen: Average rates supported by the Small Business Administration for new real estate and capital improvement loans have risen more than half a percent since September, according to data from CDC Small Business Finance, one of the program’s largest lenders.

To be sure, the central bank’s target interest rates and its high-profile recent rate cuts do not directly set interest rates on long-term mortgages and business loans. Analysts say it’s not unusual for interest rates on multi-year loans, such as 30-year mortgages, to move slightly against the direction of the Fed’s short-term goals.

But the recent gap, with Fed and bank interest rates moving in opposite directions, was “actually quite different” than the usual outcome after a Fed rate hike, said Lara Rhame, chief economist at FS Investments in South Philadelphia.

It’s “abnormal” for interest rates to fall when the economy is doing well, she said – a sign that money market participants are worried about inflation under a single-party government when politicians “can spend with fewer guardrails,” likely leading to faster rates Growth and higher prices leads to inflation.

Rhame said her research on the Fed’s performance so far suggests long-term mortgage rates could remain at or above 5% into next year.

“It’s a huge disappointment for all the people who were excited to jump in and buy homes when the Fed started cutting interest rates,” she added.

Eric Merlis, co-head of global markets for Citizens Financial Group, which operates the largest bank branch network in the Philadelphia area, said long-term interest rates reflect the economy’s growth prospects.

If mortgage and business loan rates rise despite the Fed’s rate cuts, that suggests lenders are worried about inflation; economic growth; and the prices of real estate, stocks and other assets will fall.

The number of mortgage inquiries increased after the election

During the recent presidential campaign, mortgage inquiries dropped, as if buyers were waiting to see who would win, but since the election of Donald Trump, calls from potential buyers have risen sharply, said Michael A. Kent, a senior mortgage banker in First National Bank’s Berwyn office of Pennsylvania.

“I have received more calls since Thursday than I have in the last three weeks,” he said in an interview last week. But relative to demand, there still aren’t many homes for sale, either locally or nationally, Kent added.

Nationwide, home hunting during the presidential campaign was much slower than expected, national real estate brokerage Redfin reported last week.

“Buyers are returning” since Trump’s election, but “we don’t expect interest rates to fall significantly any time soon,” said Redfin economist Chen Zhao.

Rhame, the FS analyst, said that even if the Trump administration wanted to increase U.S. housing construction, it would have to push local governments to speed up project approvals – a challenge for the country’s leaders.

Kent, the mortgage banker, noted that Fed rate cuts would have a greater impact on credit cards, auto loans and other short-term loans than on business and mortgage loans. If mortgage rates remain high, he expects more buyers will ask for variable-rate loans, as if betting rates fall in the next few years.

Analysts say high mortgage rates reflect, in part, expectations that inflation would rise next year — for example, if the Trump administration follows through on its promises to cut taxes without making corresponding cuts to key U.S. government spending categories: Medical, social security, military and debt service.

Kent added that any moves by the Trump administration that stimulate the economy more than expected – such as by expanding fossil fuel development and lowering gasoline prices – would be a welcome deflationary surprise and potentially lead to lower interest rates.

When might mortgage rates go down?

Standard 30-year mortgages are unlikely to decline until benchmark long-term loan yields for U.S. Treasury bonds fall from their current levels, said Mike Reynolds, vice president of investment strategy at Glenmede Trust Co. in Philadelphia.

At just under 7%, average 30-year mortgage rates are “not so outrageously high” that they would slow the economy, he said. “We expect interest rates to trend lower as the Fed continues its rate-cutting path. It’s just unlikely to be a straightforward process.”

He is confident that Trump will not force any rapid changes on the Fed, whose chairman, Jerome Powell, was appointed by Trump in his first term. “But the COVID period of simply printing more money” without increasing revenue “seems to be behind us.”

Reynolds hopes less deficit spending will boost economic growth and ease pressure on interest rates and the borrowers who pay them.

-Joseph N. DiStefano for The Philadelphia Inquirer

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