When the Fed cuts interest rates, most people assume that everything will get cheaper, especially mortgages. That’s why it’s so confusing when the Fed makes a move to lower rates, but then mortgage rates actually go up. It feels like the market isn’t playing by the rules. So what’s going on?
Well, here’s the thing: mortgage rates don’t just follow what the Fed does. In fact, they march to their own beat, and it’s a little more complicated than the Fed’s short-term decisions. The reason is that mortgages are long-term loans, and their rates are tied more closely to things like 10-year Treasury bonds than the Fed’s short-term rates.
Why Treasury bonds? Because investors are always trying to guess what’s going to happen with the economy in the future. And the rates on those bonds tell us a lot about what investors are thinking. So when the Fed cuts rates, that’s only part of the story. Investors are also thinking about what’s next—how the economy will perform over the long haul.
Take what happened after the Fed’s big rate cut in mid-September. Just before that, mortgage rates dropped to their lowest point in months. But after the Fed’s move, instead of continuing down, they went back up. According to Freddie Mac, the average 30-year fixed-rate mortgage ticked up from 6.09% to 6.12% in the week after the Fed cut rates.
What gives? Well, it turns out that the market had already expected the Fed to cut rates. By the time the Fed actually made the move, investors had already baked it into their pricing. So instead of mortgage rates going down more, they bumped up a bit because investors started looking ahead to the next economic signal—like a strong jobs report that sent Treasury yields climbing.
When the economy looks stronger than expected, investors worry that inflation could stick around longer, which pushes bond yields up. And when yields go up, mortgage rates tend to follow. The stronger-than-expected economic data made investors think that even though the Fed was cutting rates now, it might not be cutting much more later on. This is why mortgage rates ticked higher even as the Fed was trying to push borrowing costs down.
And here’s where things get a little more interesting: mortgage rates don’t like volatility. When the market gets jumpy, like it has been recently, investors tend to shy away from mortgage-backed securities. This lowers demand for those bonds, pushing mortgage rates up even more. So even if the Fed cuts rates again, it doesn’t guarantee that mortgage rates will drop. If the market is still all over the place, mortgage rates could stay high or even go higher.
In short, mortgage rates aren’t just reacting to what the Fed does today—they’re reacting to what investors think the Fed will do, and what’s going on with the economy as a whole. And right now, there’s a lot of uncertainty, which means mortgage rates could remain elevated.
So, if you’re hoping for mortgage rates to fall dramatically, it might take more than a few more Fed rate cuts to get there. We might need to see a real downturn in the economy before that happens. In the meantime, don’t be surprised if mortgage rates stay a little unpredictable, no matter what the Fed does.