Why Mortgage Rates Went Up After the Fed's Big Cut

Tracy Alloway (0:00)

Hey, Odd Lots listeners, Joe and I have something very exciting to share with you. We are going to be hosting a live recording of the podcast on the Lower East Side of New York at Caveat. We're doing it on November 4th. That is of course the night before the big US election. So join us for an evening of policy discussion, trade, all that good stuff. We're going to be hosting Brad Setzer from the Council on Foreign Relations. And we'll also have some surprise guests for you as well. So you can find the link to buy tickets in our new daily Odd Lots newsletter or on social media where no doubt Joe and I will be talking about it a lot. So definitely come join us November 4th at Caveat on the Lower East Side.

Joe Weisenthal (0:52)

Bloomberg Audio Studios.

Tracy Alloway (0:54)

Podcasts, radio, news. Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (1:13)

And I'm Joe Weisenthal.

Tracy Alloway (1:15)

Joe, have you noticed mortgage rates recently?

Joe Weisenthal (1:17)

Yeah, they've been up. In fact, we're recording this October 16th. Mortgage rates have been rising. And in the last couple of weeks, mortgage applications, according to new data out today, have been down. Refi applications have been down. And of course, it's all ironic because we got that rate cut.

Tracy Alloway (1:34)

Yeah, that's right. So benchmark rates have been cut by 50 basis points. So we've moved to like 5% from the 5.5% on the upper bound. That happened on September 18th. But since then, as you point out, mortgage rates have actually gone up. So I think we've moved from like 6.6% on the 30 year to something like 6.9% as we're recording this. We were very close to 7% last week. And just intuitively, that is not what you would expect to see happen when benchmark rates are getting cut.

Joe Weisenthal (2:10)

All right. I don't want to ever insult fellow colleagues, or not colleagues, but other people in the media. And actually, I have no basis for this. But in my mind, there are a bunch of explainers out there on the internet, like, what do Fed rate cuts mean for you? And someone put a bullet in there that said, oh, they mean lower mortgage rates and stuff like that. And obviously, there's a connection between Fed rates and what people pay for a 30-year fixed rate mortgage or some other flavor of mortgage. But it's clearly not, there's reasons why it's not one-to-one, and there's nothing mechanical about the day the Fed cuts rates that suddenly borrowing costs for homeowners drop.

Tracy Alloway (2:50)

Yeah, that's right. And this actually came up in our interview with Chicago Fed President Austin Goolsbee, talking about what is the impact of rate cuts on the overall economy. And he talked about how everyone has a fixed rate mortgage now, and so that doesn't necessarily feed through. But I guess it does pose some existential questions for monetary policy transmission. Like, if the benchmark rate was a person, it would be that guy pointing at himself in the mirror, criticizing his own irrelevance, I guess.

Joe Weisenthal (3:21)

That's interesting. I wasn't sure we were going with that, but that's interesting.

Tracy Alloway (3:25)

That's just what springs to mind.

Joe Weisenthal (3:27)

You know what I don't get? I mean, I kind of get it, because we've done episodes on mortgages, but most mortgages in this country are backed by the US government, or Fannie and Freddie implicitly, and now more or less explicitly. Why can't we all just get mortgages at the 10-year rate or the 30-year rate? Seriously, if the government can borrow at the 30-year rate and the government is backstopping it, why don't we just all get those same prices for a mortgage? I know there's reasons, but still I need to be reminded what they are.

Tracy Alloway (3:54)

Okay, so this episode is going to be all about why Joe can't get a mortgage at 4% at the 10-year rate. We are going to answer that question. And I'm very happy to say we do in fact have the perfect guest for this episode. We're going to be speaking with Tom Graff. He is the CIO of Facet, which is a financial planning firm, and currently has $4 billion under management. But, perhaps more importantly for this subject, he was a bond portfolio manager for many, many years. And when he started out in finance, he was actually in mortgage bonds. So he's going to walk us through the sort of mortgage bond ecosystem and all the maths that goes into producing the final rate.