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August 13, I was talking about my favorite Greek Yoghurt and how it related to mortgage rates.  Yes, I spelled it "yoghurt".  That's because I am paying homage to the beautiful city of Dublin.  It was even sunny for a few minutes this morning.

But I digress.

August 13 is sort of significant for other reasons.  On August 13, markets were pretty certain that the Fed was going to hold the Fed Funds Rate at 5.250% at its next meeting.

Then, on August 16, Countrywide went public with its credit problems.  Next, on August 17, the Fed cut its discount rate by 50 basis points to help promote liquidity among banks. 

That's when speculation grew in earnest about a looming Fed Funds Rate cut at the September 18 meeting.

According to the graph above from the Cleveland Federal Reserve, the probability of the Fed leaving the FFR unchanged August 13 was pegged at 55 percent.  This past Friday -- in the wake of the jobs report -- that probability dropped to three percent. 

Meanwhile, the odds of a 50 bps decrease down to 4.750% followed the exact opposite pattern.  Follow the yellow and blue coloured lines to see what I mean.  And yes, more homage to Ireland and its fanciful spelling.

If you're wondering why mortgage rates have improved lately over the last 28 days, the graphic is terrific place to start finding answers.  The bigger the expected drop in FFR, the lower mortgage rates should go.  To market participants, a drop in the FFR is a signal of slowdown, or even worse, a recession.  Both of those scenarios tend to drop mortgage rates.

At this point, though, the market's expectations have changed so fast that we're likely sitting in an "over-bought" pattern.  Even if the Fed does drop the 50 basis points that markets are expecting, it's likely mortgage rates will bounce higher on the news; there are just too many folks that are betting on seventy-five basis points or more.

Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.