Since the Federal Reserve's 50bps rate cut in September, financial conditions have unexpectedly tightened despite the expectation of looser conditions. The Fed's action lowered the federal funds rate, a key short-term interest rate, but the direct control over long-duration yields is limited. As a result, market forces influenced these longer rates, which began to rise following the Fed's decision. Concerns about a potential recession had already led to a substantial drop in long-end yields, but positive economic data in the following months prompted a shift in the market's expectations, with many long-end rates increasing. Given that most borrowing occurs at the long end of the curve, higher long-term yields mean that financial conditions actually tightened. Consequently, mortgage rates also rose since the Fed’s cut, contradicting the expectation that rate cuts would lower borrowing costs. This scenario illustrates that while the fed funds rate may decrease, ongoing dynamics in longer rates can lead to increased borrowing costs overall, tight financial conditions, and a less appealing environment for refinancing.

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