When the Federal Reserve lowers its benchmark rate, many of us expect mortgage rates to follow, but often they don’t drop nearly as much (or as quickly) as people imagine. Here’s what’s going on behind the scenes, and what it means if you're thinking about buying or refinancing.
The Fed controls short-term interest rates (especially the federal funds rate). That’s different from long-term rates, which more directly influence fixed mortgage rates. Mortgage interest is heavily influenced by what’s happening in the bond market, especially yields on 10-year Treasury bonds. If those yields remain elevated, mortgage rates often stay high regardless of what the Fed does.
Often, by the time the Fed makes a rate cut, the markets (including bond investors) have already been anticipating it. That means the “benefit” of the cut is often partially or mostly baked into current yields before the announcement. So when the cut finally happens, there isn’t much room for mortgage rates to drop further.
Mortgage lenders and investors care a lot about inflation: current inflation and what people expect inflation to be in the future. If inflation remains sticky (or if investors believe it might pick back up), lenders demand higher yields to compensate for the risk that inflation erodes their returns. That pushes mortgage rates up (or keeps them from falling).
Mortgage rates are tied to the securities that back them (mortgage-backed securities, or MBS). If investors see more risk (economic slowdown, weaker job market, geopolitical risk, etc.), they may demand higher returns on those securities. That demand for higher returns shows up in higher mortgage rates. And if the overall bond market is volatile, that uncertainty often keeps rates from dropping.
Even when rate cuts happen, the demand for mortgages, housing supply, and lending standards also matter. If lenders are more cautious (for example, requiring stronger credit or larger down payments), or if home prices remain high, fewer people may qualify or be willing to take on mortgages. This can add friction that keeps mortgage rates from falling. Also, the supply of houses and how eager sellers/buyers are matters: in tight housing markets, even small rate improvements don’t immediately shift affordability or demand.
It’s important to remember: the Fed’s benchmark rate doesn’t directly translate into mortgage rates. It’s one tool among many. For mortgages, long-term economic expectations, inflation expectations, bond yields, and investor behavior are typically more important than what the Fed does in the short term.
If you’re watching mortgage rates and hoping for relief, here are a few practical takeaways:
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