The election is over. The Federal Reserve has met and made their decision regarding short-term interest rates. The next question is – where do we go from here? While the Fed has lowered their rates, mortgage rates actually increased leading up to the election and the meeting of the Fed. And this increase was not a small bump in rates, as mortgage rates rebounded by over a half percentage point from their lows.

It is quite obvious that the Fed does not directly control the direction of mortgage rates. Long-term interest rates, as reflected in the bond market, react to what traders believe will happen – or the economic scenario. For example, the Fed raised rates to bring inflation down. They are now lowering rates because inflation is near their 2.0% annual target. If the markets believe that inflation is really under control, they will act in concert with the Fed’s action and long-term interest rates such as mortgage rates will move lower.

Conversely, if the markets are not convinced that the Fed is satisfied that the inflation battle has been won, they will be subject to volatility like we have seen. Inflation is not the only factor. For example, if the government must increase borrowing because budget deficits are soaring, that can also cause interest rates to rise. But inflation is a big part of the picture. Speaking of inflation, the latest consumer price index was released last week, and it showed that prices continued to moderate, but especially the core numbers excluding inflation continue to be higher than the Fed’s 2.0% target.  On the wholesale side, the numbers were congruent with the retail inflation results. This likely signals that the Fed will continue to act with caution with regard to the future of interest rates.