The Federal Reserve is anticipated to cut interest rates in September, and many borrowers are left wondering if they should wait to take out a loan. Our research suggests that waiting for future interest rate cuts may not be a wise strategy for those looking to secure a mortgage or other long-term loans. A common misconception among borrowers is that future Fed decisions, such as lowering interest rates, will lead to significantly better loan terms if they wait. However, historical data reveals that this belief is often misplaced.

Long-term interest rates, such as those on mortgages, typically reflect the market’s expectations of future short-term rates. This means that when the Fed is expected to cut short-term rates, long-term rates often drop in advance to account for the anticipated policy shift. Borrowers hoping to secure lower rates by waiting may miss out on current favorable rates, as future cuts are already priced into existing long-term rates. Our findings suggest there is no benefit to waiting, as the present long-term rates already incorporate the expected short-term cuts.

Similarly, when the Fed signals a future increase in interest rates, borrowers often rush to lock in long-term loans, fearing that rates will rise steadily over time. However, this strategy is also flawed. The moment the Fed announces potential rate hikes, long-term rates typically adjust immediately, reflecting the expected future changes in short-term rates. As a result, rushing to secure a loan before the Fed acts may not result in a lower rate, since the market has already adjusted to the anticipated changes.

This confusion stems from a cognitive bias known as categorical thinking. People tend to group short- and long-term interest rates together, assuming they will move in tandem. While these rates are correlated to some extent, long-term rates are an average of expected short-term rates over the loan’s duration, not a direct reflection of future rate changes. Even educated and sophisticated individuals, including corporate managers and bond investors, frequently fall into this trap. Their misunderstanding can have a ripple effect, as they control large portions of the economy’s investment decisions.

The misconception surrounding short- and long-term interest rates can undermine the Fed’s efforts to control the economy. When the Fed announces gradual rate increases, it expects the rise in long-term rates to curb borrowing and slow inflation. However, the rush to lock in loans before rates increase can actually fuel inflation, particularly in sectors like housing. This unintended consequence highlights the importance of understanding the distinct behavior of short- and long-term interest rates when making borrowing decisions.

So, the quick answer is….  No!  If purchasing, remember the term “marry the home and date the rate”.  It’s really tough to time the market.