These days, speaking to current events and navigating the data while avoiding the politicization (and polarization) of the data is almost as hard as ignoring the barrage of Taylor Swift/Travis Kelce posts flooding our feeds. Side bar: Is it just me, or does the timing of their engagement feel suspiciously obvious given the start of the football season? Haters gonna hate, but I’ve personally stacked my fantasy roster heavily with Kansas City players.
With my aforementioned warning (the political one, not Swift), and so as not to stray from real talk and relevant discussion, we must take a hard look at the impacts of Trump’s actions regarding the Fed. This preface is not a debate over right versus wrong, but purely about the market impact of the perceived actions. The most recent development is Trump seeking to fire Lisa Cook from the Fed (due to alleged mortgage fraud), which is being perceived as a strategic goal to gain Fed influence. With growing allies such as Bowman and Waller, he would only need a majority of four to block the appointment of regional Fed members in the future. With an impending new Fed Chair based on Trump’s desired appointment, it’s not far-fetched to see how Trump could have the influence he needs to get the rate cuts he’s seeking.
How this is impacting the markets today starts with the yield curve. We are steepening, meaning short-term Treasuries are falling faster than longer-term ones. The reason the longer-term yields remain elevated is due to concerns about inflation. If the Fed cuts outweigh the inflationary pressures, buying short-term bonds is seen as a safer bet than locking in a longer-term yield in the face of inflationary value erosion. Currently, the market still fears inflation and worries that cuts may exacerbate it.
Regarding mortgage rates, this is where things get a bit nuanced for us. Our rates are primarily influenced by the middle of the yield curve (specifically the 10-year Treasury) since the average life of a mortgage is typically 7 to 10 years. Short-term rates, such as the Fed Funds Rate, are closely tied to the 2-year Treasury, while longer-term rates, such as the 30-year Treasury, are less directly connected to mortgage pricing, though they still play a role in broader financial markets, especially in areas like corporate debt.
So, with that all said, will the Fed cuts have the impact on mortgage rates we are desperately seeking? The short answer: it depends. I believe it will mostly come down to inflation. If the tariff impacts are transitory and inflation can still be tamed (even in the wake of future Fed cuts), then the overall belly of the curve (the 10-year index) will decline, and mortgage rates will drop. Even if steepening occurs (known as bullish steepening), both short-term and long-term Treasuries can fall in the wake of monetary policy being loosened (cuts) and inflation beginning to subside.
I know that was a lot today (just shake it off... shake it off), but if you stuck with me, you hopefully gained some greater insight into the impacts and potential outcomes at hand. Whether the Trump-effect turns out to be a positive or negative, knowing what’s at stake is half the battle… Now, if only predicting the outcome of the Fed’s next move were as easy as anticipating the likelihood of another Taylor Swift album drop…