Federal Reserve Chair Jerome Powell moved markets on Wednesday with his comments on the central bank’s recent interest rate cut, prompting a sell-off in bonds that could send mortgage rates higher.
Powell’s remarks followed soon after the first Fed rate cut in nine months, which brought the central bank’s benchmark rate down by a quarter-point to a range of 4% to 4.25%.
The rate cut itself was widely anticipated and had virtually no impact on the markets that determine mortgage rates.
However, long-term bond yields dropped sharply with the release of new economic projections from Fed policymakers, and then surged back to session highs as Powell spoke with reporters.
Bond yields and prices move inversely to each other, and mortgage rates tend to follow the yields on 10-year Treasury notes, meaning Powell’s comments put upward pressure on mortgage rates.
Investors seemed particularly spooked by Powell’s characterization of the rate decision as a “risk-management cut” in response to a weakening labor market, while elevated inflation remains a concern.
“You could think of this in a way as a risk-management cut because, if you look at the [Summary of Economic Projections], actually the projections for growth this year and next actually ticked up just a little bit and inflation and unemployment didn’t really move,” said Powell.
In fact, the projections issued by Fed policymakers on Wednesday actually revised inflation expectations for 2026 slightly higher, and the unemployment rate forecast slightly lower, in comparison to the last projections issued in June.
Those revised projections don’t seem consistent with rate cuts, leaving investors puzzling over how to reconcile the Fed’s policy decision, the projections, and Powell’s comments.
“Powell said several times in the press conference that there is no risk-free move,” says Realtor.com® Chief Economist Danielle Hale. “I interpret a ‘risk-management cut’ as one that is trying to balance the risks that are in tension at this particular point in the cycle.”
New ‘dot plot’ shows Fed policymakers in disagreement
Once per quarter, the Fed releases a “dot plot” that shows how the members of the Federal Open Market Committee (FOMC) predict the future path of interest rate policy will play out.
The dot plot includes the anonymous opinions of the 12 voting members of the FOMC, as well as seven members who do not cast votes.
The version issued on Wednesday shows a huge range of opinions: One hawkish FOMC member predicts a rate hike before the end of the year, and one extreme dove calls for the equivalent of five quarter-point rate cuts over the next two meetings.
The extreme dove forecast predicting severe rate cuts is widely believed to be that of Stephen Miran, who was newly appointed by President Donald Trump and joined the Fed’s Board of Governors on Tuesday.
Miran was the lone dissent in Wednesday’s 11-1 vote. The White House economic adviser instead voted for a larger half-point rate cut, in keeping with Trump’s frequently stated view that the Fed interest rate should be dramatically lower.
The consensus expectation from the dot plot showed two further quarter-point rate cuts in 2025, amounting to one each at the meetings in October and December.
That path is in line with what markets had expected. However, the extreme range of opinions evident in the plot is discomfiting to investors, who had hoped to see a more unified consensus around rate cuts.
Turning to next year, the dot plot’s consensus forecast calls for just one quarter-point rate cut through the end of 2026. That’s fewer than the three cuts that had been priced in by bond markets, a divergence that could put upward pressure on mortgage rates.
Although weekly mortgage rates fell again on Thursday, reaching an 11-month low of 6.26%, that movement largely reflects changes in the bond market ahead of the Fed decision.
After Powell’s comments and subsequent economic data on Thursday that showed fewer weekly unemployment claims than expected, 10-year Treasury yields have marched higher, suggesting that mortgage rates could tick back up in the coming days.
Next week, a slew of FOMC members are scheduled to speak, including Miran in his first public comments as a member of the Board of Governors.
Their comments, as well as key new data on inflation, will set the trend for mortgage rates, determining whether they continue to fall, level off, or start a new upward trend.
