As expected, the Fed lowered rates by 0.25% this week — a move well broadcast by the markets and reflected in the recent drop in both Treasury and mortgage rates. In addition to the movement in rates, what stood out most was the Fed’s accompanying commentary and economic projections. Interestingly, they’re now forecasting slightly higher inflation, steady employment, and modest GDP growth. With that outlook, one might wonder whether a rate cut was even necessary. Still, the Fed made its move, sparking renewed debate about what comes next.
Although some analysts are calling for as many as five rate cuts over the next year, we’re not convinced. Our base case is for two cuts, maybe a third — but that’s far from certain. Inflation remains sticky, and while the labor market isn’t booming, it’s holding up reasonably well. Despite a slowing economy, it’s important to consider the potential impact of Trump-era economic policies, which are just beginning to roll back in and could provide a tailwind in the coming quarters.
One curious development following the Fed announcement was the behavior of the 10-year Treasury. It briefly dipped below 4%, but has since climbed and now sits around 4.12%. This uptick reflects a growing concern among bond pros: when the Fed cuts short-term rates, longer-term yields don’t always follow — and in some cases, they move higher. A large amount of supply is hitting the bond market, with hundreds of billions in Treasuries coming due that need to be refinanced. Add in persistent fiscal deficits and inflation still tracking above target, and you’ve got a recipe for upward pressure on long-term rates.
What This Means for Borrowers
The good news is that lower short-term rates are already providing relief for borrowers with floating-rate loans, HELOCs, or bridge financing tied to short-term benchmarks. For borrowers seeking long-term fixed-rate solutions, the outcome depends on where the 10-year Treasury settles.
For now, we believe the majority of the rate drop has already been priced in. We don’t foresee significantly lower rates from here. That said, public awareness of this move is growing. As expected, our phones have been lighting up with calls for pre-approvals and refinance requests.