With the Federal Reserve announcing a 25 basis point interest rate cut in December, the market generally expects borrowing costs to decrease; however, recent mortgage rates in the USA's Real Estate market have risen instead of falling. What is going on?

The relationship between long-term bond yields and mortgage rates is closer.

Some analyses indicate that the Federal Reserve's interest rate cuts mainly affect short-term rates, such as the federal funds rate, which in turn impacts a range of borrowing costs from credit cards, Autos loans, to adjustable-rate mortgages (ARMs).

Most mortgage rates, especially fixed-rate loans, are more closely correlated with long-term bond yields. Currently, the yield on 10-year USA Treasury bonds is skyrocketing, which also drives up mortgage rates.

On the other hand, Federal Reserve rate cuts do not directly affect long-term bond yields, so while both short-term rates and long-term bond yields are influenced by the macroeconomic environment, they do not move in sync.

Therefore, this disconnection may lead to a situation where, despite the Federal Reserve's efforts to lower borrowing costs in the overall economy, mortgage rates continue to rise.

Concerns about inflation and economic slowdown have pushed up Bond yields, causing mortgage rates to rise instead of fall.

It seems that a "domino effect" is at play behind the rise in mortgage rates.

Analysis suggests that mortgage rates are very sensitive to inflation expectations. If investors believe that the Federal Reserve's rate cuts indicate rising inflation pressures, they may demand higher yields on long-term Bonds to compensate for the loss in purchasing power.

Currently, the Federal Reserve also admits it cannot control inflation, and Powell even stated that it might take two years for inflation to return to the Federal Reserve's target level. However, this seems overly optimistic, as renowned economist Peter Schiff recently said:

"Inflation will not approach 2% within two years; it will be higher than it is now. Powell's views on inflation and the economy are still incorrect... I believe we are facing stagflation, and the situation will worsen."

Analysis indicates that if Bond investors view rate cuts as a sign of weakening economic conditions, they may sell off Bonds, pushing yields higher. Under a series of interconnected 'dominoes', mortgage rates tend to rise as well, which goes against the Federal Reserve's intention to reduce borrowing costs.

Some analyses point out that if investors believe the economic situation is deteriorating, they may also demand a higher premium to bear long-term risks, passing this risk onto borrowers, thereby leading to higher mortgage rates. Meanwhile, as the market expects inflation to rise, they will also demand increasingly higher yields.

The Federal Reserve seems to be trapped in a 'cycle', and a bubble may burst by 2025.

Subsequently, as mortgage loans have become more expensive and costs such as home insurance, materials for home improvement projects, and other expenses contributing to the collective burden of homeownership have also increased, those wishing to buy homes are delaying their plans, pushing Commercial Property to the brink of bankruptcy. Consequently, the Federal Reserve is caught in the dual dilemma of needing to lower borrowing costs while alleviating inflationary pressures.

Analysis suggests that the Federal Reserve cannot accomplish both of these tasks at the same time. In a situation of economic stagnation and high inflation, with the 10-year yield continuing to soar nearly 5%, mortgage rates are expected to rise further; this creates a 'vicious cycle':

'The year 2025 could be the year they face the consequences of their actions, as all bubbles eventually burst. The Federal Reserve is trapped in a cage of deteriorating economic conditions, soaring deficits, ballooning debt, and high inflation, unable to escape.'