Followi When the Federal Reserve (Fed) cuts interest rates, it is usually intended to stimulate economic activity. Here's what typically happens when the Fed lowers its benchmark interest rate: 1. Lower Borrowing Costs For Consumers: Lower rates make borrowing cheaper for consumers, particularly for loans such as mortgages, car loans, and credit cards. This often leads to increased spending and investment by consumers, which can boost economic growth. For Businesses: Companies can borrow at lower rates to invest in new projects, hire more workers, and expand operations. Lower borrowing costs can encourage business growth and investment. 2. Increased Consumer Spending Lower interest rates reduce the cost of borrowing, encouraging consumers to finance purchases, especially of big-ticket items like homes and cars. This increased demand for goods and services can help boost the economy. 3. Encouraging Investments Stock Market: Lower interest rates can make stocks more attractive compared to bonds or savings, as the yield on safer assets decreases. This can push stock prices higher, as investors seek higher returns from equities. Business Investment: Lower borrowing costs can prompt businesses to expand by purchasing new equipment, hiring more employees, or pursuing new ventures, which in turn stimulates economic activity. 4. Weaker Currency Lower interest rates can weaken the U.S. dollar in international markets because investors may seek higher returns in other currencies. A weaker dollar makes U.S. exports more competitive abroad, which can help boost domestic manufacturing and the economy. 5. Stimulates Inflation When borrowing becomes cheaper, demand for goods and services can increase, leading to higher prices. The Fed typically lowers rates when inflation is low or economic growth is sluggish. If demand rises faster than supply, inflation may increase, which is one goal if the economy is too slow. 6. Lower Savings Returns Savings accounts, certificates of deposit (CDs), and other fixed-income investments typically yield lower returns when rates are cut. This can push savers to spend more or invest in higher-risk assets like stocks to achieve better returns. 7. Boost the Housing Market Lower interest rates make mortgages cheaper, potentially driving up home sales and home prices as more people can afford to buy homes. 8. Employment Growth Lower borrowing costs for businesses may lead to more hiring, as companies can finance expansions or projects at a cheaper rate. This can reduce unemployment rates and increase overall wages over time. 9. Risk of Overheating If the Fed cuts rates too aggressively, it could lead to excessive borrowing and spending, which might cause inflation to rise too quickly, creating the risk of an overheated economy. Why the Fed Cuts Rates The Fed typically lowers interest rates during periods of economic slowdown, recession, or low inflation to encourage economic activity. Conversely, it raises rates when inflation becomes a concern or when the economy is growing too quickly. In summary, a Fed rate cut is meant to stimulate the economy by making borrowing cheaper, encouraging consumer and business spending, and promoting investment. However, it can also carry risks, such as inflation and asset bubbles. tune in and learn at https://www.ddamortgage.com/blog didier malagies nmls#212566 dda mortgage nmls#324329

The Federal Reserve cut rates on Wednesday and mortgage rates went up! What happened? The answer lies in the bond market. The 10-year yield and 30-year mortgage rates have been in a slow dance since 1971 and trended together. The bond market isn’t old and slow like the Fed — it moves very quickly, and for months it has been sending the 10-year yield (and mortgage rates) lower in anticipation of a series of Fed rate cuts, not just one or two. As I’ve said for several months on the HousingWire Daily podcast, the key to understanding mortgage rates is to focus on the labor and economic data—not rate cuts. The 10-year got as low as 3.60% yesterday, but then housing starts data came out. Housing starts beat estimates, and the single-family permits data shows that they are growing again. The 10-year yield was already higher before the Fed announcement , The growth of housing permits is a good sign for economic expansion, and falling mortgage rates since June have helped push this data line. We would not have this conversation if mortgage rates were still in the range of 7.50%- 8% today. The bond market got ahead of the Fed, pushing bond yields and mortgage rates lower—which has already made a difference . So what now? Today’s jobless claims data came in better than expected, sending yields higher again, which looks perfectly normal. The bond market is so far ahead of the Fed that it can sit and watch to see how the economic data trends. If housing starts, industrial production, and jobless claims were worse than expected, we would have a different discussion today. However, that’s not the case — the economic data, even retail sales this week, came in as a beat.  So, if you’re confused about why rates went up, remember that the bond market gets ahead of the Fed. And listen to the podcast — we’ve been discussing this for months. The labor market has been softer with the data’s internals since the end of 2023, and the Fed is only now worried about a risk to labor. This means they need to play catch up to the market pricing. The 10-year yield is currently at 3.74%, up from yesterday’s lows and slightly higher from the close. For mortgage rates to go lower , we need to see three things: 1. Mortgage spreads getting better 2. Economic and labor data getting softer 3. The Fed getting more dovish with their statements, showing a willingness to do more to help the economy stay out of recession Until then, the last 24 hours make a lot of sense to me, given the economic data and where the bond market was trading before the housing starts data came out.