Home shoppers who waited for the Fed to cut interest rates to apply for a mortgage waited too long.

While the federal funds rate was cut 0.50% to 4.83%, mortgage rates jumped nearly half percent to over 6.5%

Why?

It’s important to remember the Federal Reserve doesn’t control all interest rates

They only set the overnight lending rate between banks. The bond market buyers and sellers control the rest of the interest rate curve, including 30-year mortgage bonds.

Ok- so why did 30-year interest rates rise?

There are several possibilities, but here are the strongest ones (in our opinion)

The Labor reports have come back signaling a stronger economy than expected.

If that’s the case, the Fed might not need to cut rates as aggressively as the market expected. When the economy and consumers are doing well, they might not need the economic stimulus of lower borrowing costs.

Inflation is lower, but not dead.

When almost everyone has a job and money to spend, the cost of goods can remain high and even increase. Over the very long run (100 years +) Inflation has averaged 3% annually. High rates are one way to keep a lid on inflation.

Money Supply (and the national debt) will likely remain elevated in the coming years.

Ignoring the growing national deficit and debt appears to have support from Republicans and Democrats. Or, as Stanley Druckenmiller* put it: "Bipartisan fiscal recklessness is on the horizon."

The Bottom Line:

Due to a strong economy and heightened inflation expectations, bond buyers expect higher yields than they did a month ago.

If the value of their money is going to diminish over the next 30 years (inflation) one expects a higher return when you lend it out. As our friends say: “Money should cost something”

*When Druckenmiller speaks, Wall Street listens. He ran Duquesne Capital (a Hedge Fund) from 1981 to 2010 which produced 30% annualized returns over those 30 years, and never had a losing year. He returned all capital to clients and closed the fund, preferring to manage his own money. Today, he’s short long-term treasuries: https://www.morningstar.com/news/marketwatch/20241002138/stanley-druckenmiller-says-hes-shorting-us-bonds-and-staying-out-of-china