Borrowing Rates Much Less Correlated with Fed’s Policy Rate

In September, the Fed cut the target range for its policy rate by 50 basis points to much publicity, with several media outlets claiming that this was the first step toward reducing borrowing costs and easing the debt burdens faced by many Americans. Of course, the implicit assumption is that economy-wide borrowing rates such as auto loans, credit cards, or mortgages are intrinsically linked to the Fed's policy instrument--the federal funds rate (FFR). It may come as a surprise, then, that several borrowing rates, ranging from treasury securities to mortgage rates, have increased since the Fed's rate cut. In fact, the discrepancy between the FFR and other borrowing rates has been prevalent for some time. The rates had started to increase before the series of rate hikes executed by the Fed in response to post-pandemic inflation. On the surface, it is fair to assume that changes to the FFR should be transmitted through to other borrowing rates. After all, the FFR is believed to represent the cost borne by financial institutions to acquire liquid reserves for themselves in the interbank lending market. If the cost to acquire funds is low, then the cost of lending these funds to consumers must be equivalently low. However, since the overhaul of the Fed's operating procedures in the aftermath of the financial crisis, the FFR no longer holds sway as it once did.