The Federal Reserve Cuts Commercial Lending Rates…Why did Consumer Lending Rates Go up Then?

In the September Federal Reserve meeting that finished yesterday, the Federal Reserve cut its benchmark interest rate by 0.50 percentage points vs .25 as originally planned.  This makes the first rate cut in 4 years.  This shift is expected to eventually lower borrowing costs across various consumer loans, including mortgages, auto loans, and credit cards but first lowers commercial lending rates.

With the federal funds rate now between 4.75% and 5.00%, consumers might see gradual reductions in loan rates, although the pace will depend on broader economic conditions like inflation and employment trend.

Why Did Rates Go Up Yesterday?

The Fed’s rate cut sent signals out to the market, that the central bank is focused on stimulating economic growth by making borrowing cheaper.  When the Federal Reserve lowered rate by .5 instead of .25, it forced the 10-year Treasury yield to increase from a low of 3.60% to 3.74% causing consumer rates to go up to levels we saw several weeks ago due to following reasons:

1. Inflation Expectations: Lower rates can lead to higher inflation over time, which reduces the value of long-term bonds like the 10-year Treasury. As investors anticipate rising inflation, they demand higher yields to compensate for the potential decrease in purchasing power over time.
2. Economic Growth Optimism: A rate cut can also signal confidence in future economic recovery. If investors expect stronger growth, they might shift from safe assets like Treasuries to riskier investments (stocks, corporate bonds). This sell-off in Treasuries pushes yields higher.
3. Bond Supply and Demand: The bond market is influenced by supply and demand dynamics. If there is a significant selling of longer-term bonds, yields will rise. This can happen if the market believes that the Federal Reserve’s policy will eventually lead to inflationary pressures or more aggressive borrowing from the government.

Clients we had locked on purchases and refinances are happy we locked as we’ve seen this before in other markets over the last 30 years.  Remember, a Fed Drop does not always lower real estate rates.  Often it increases them in the short term like it did yesterday and takes a while for them to trickle down.

For a rate quote or loan comparison on either a purchase or refinance, please contact us.  In addition, if you’d like us to track rates for you, please let us know.  Thanks.