It was a week for paradoxes on several fronts, most notably when mortgage rates moved lower just after the Fed floated the idea of an even bigger hike. There’s a popular misconception that the Fed sets mortgage rates, or controls them directly in some way.  They don’t. The Fed sets the Fed Funds Rate (FFR) which applies to loans between big banks for less than 24 hours.  Mortgage rates are control by bonds that last years.  FFR is a short-term rate and mortgages are longer-term.    The only major exception is seen when the Fed is changing its bond-buying plans.  Those bond purchases have a direct impact on mortgage rates because they include the bonds that underlie the mortgage market as well as other longer-term bonds that move in concert with mortgages.  All that having been said, we haven’t had any big news on Fed bond buying in months. The other reason mortgages don’t care about the Fed Funds Rate is that the Fed only meets 8 times a year whereas mortgage rates change every day (sometimes more than once!).  That means mortgages as well we the rest of the bond market can move well in advance of the Fed actually pulling the trigger.   In fact, betting on future Fed rate hikes is big business.  Securities known as Fed Funds Futures trade for exactly this purpose.  They go a long way in explaining this week’s paradoxical movement.  The chart below shows Fed rate hike expectations for the middle of next year as well as 10yr Treasury yields (which correlate very well with mortgage rates)