What Might a Fed Rate Cut do For Mortgage Rates?

Mortgage rates have fallen nearly 2% from last year's peak.  Much of that decrease can be viewed as the normal phenomenon of longer term rates getting in position for changes in short term rates.  The point we're about to make is that mortgage rates have already adjusted for what the Fed is likely to do--not just at this meeting, but many of the upcoming meetings as well. The Fed Funds Rate is an "overnight" rate.  It is the rate on a loan of less than 24 hours.  A 30yr fixed mortgage rate is a loan for anywhere from 3-10 years depending on a number of variables.  Why not 30 years?  Simply put, most people sell or refinance well before the 30 year mark.  Investors care about the average life span and that's where the 3-10 year time frame comes in. For the sake of easy comparison, let's say a mortgage is most analogous to a 5 year loan.  That means it would act more like a 5yr Treasury yield (Treasuries are the vanilla, risk-free benchmark for all other rates in the U.S.). The Fed Funds Rate is essentially a 1 day Treasury yield. From there, investors assign value to loans/bonds based on their going rate and the market's preference for holding certain durations of bonds.  Longer term bonds tend to reflect the current short term bonds + the outlook for how those short term bonds will change over time.  In other words, if you could know what the Fed Funds Rate would do over the course of the next 2 years, you could know a lot about how a 2 year Treasury yield should look today.