Why Are Interest Rates Going Down After the Fed Raises Rates?
There is a lot of confusion and misconceptions when it comes to the Federal Reserve raising rates. With the recent increase of .75 percentage points, the federal funds rate ranges from 2.25 to 2.50 percent. The Fed is making these increases to battle inflation and the adjustments affect banks and their liquidity, and the rate they pay when borrowing from the Federal Reserve.
It's important to note that mortgage rates are entirely independent of the federal funds rate. The majority of commercial mortgage loans are priced off of 5, 7, or 10-year US treasury rates. In recent months, the 10-year Treasury rate has rapidly increased at the same time as the fed fund rate increased, leading to the misconception that the two are linked.
As a recession is becoming more and more likely, short-term treasuries and long-term (10-year Treasury) rates have inverted, even with the fed fund rate increaseing. Long-term bonds and interest rates are based on the likelihood of a recession rather than the effects of inflation, therefore as the Fed Funds Rate continues to increase, the mortgage rates will likely go down due to recession fears. This explains why the 10-year Treasury is down 0.50% in the past 2 weeks, even with the Fed raising rates 0.75% on July 27.
The possibility of a recession could be proven by the yield curve data we’re seeing. The two- to 10-year segment of the yield curve inverted in March and again in June, and this occurrence happens before each recession since 1955.
According to Bloomberg, the 3.5% 10-year Treasury yield may be the peak for 2022, and it’s possible that if the trends we are seeing continue, the 10-year Treasury yield could fall as low as 2.5% in the second half of the year. This is good news for investors looking to finance upcoming commercial real estate investments.
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