A documented sequence, not a forecast. It states what would falsify it, and where it has failed before.
Trigger
Policy rate cut, or the market pricing a series of cuts, without a recession
How it runs
- Two-year yield falls as the market prices the Fed's path
- Mortgage rates follow the ten-year down, with a lag and a wider spread than history suggests
- Housing transactions recover before prices do — the lock-in effect breaks as the gap between existing and new mortgage rates narrows
- Refinancing activity releases household cash flow, which shows up in discretionary spending two quarters later
- Long-duration equities re-rate: the further out a company's profits, the more a lower discount rate is worth to it
- Banks' net interest margins compress on the asset side but funding costs fall faster; loan volume rises
What it means for a household
Borrowers gain, savers lose. A household with a mortgage to refinance or a first home to buy gains materially; a retiree living on deposit interest and annuity rates loses.
What would prove it wrong
Falsifier
Mortgage rates failing to follow the policy rate down, because the term premium is rising faster than the Fed is cutting. If long rates rise while the Fed cuts, this chain does not run — and that has happened recently.
Where it has failed
Precedent
2024. The Fed cut and thirty-year mortgage rates rose, because the bond market was pricing government borrowing rather than Fed policy.
Its neighbourhood
Everything this entry connects to directly. Click any point to follow it.
Watch these to confirm it
If the chain is running, these move in this order.