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Why Fed Interest rate Reduction Does Not Mean Mortgage Rates Reduction

Myth busted!

Here's why:

The Fed's rate is different from mortgage rates. The Fed controls the overnight lending rate between banks. That impacts short-term borrowing like credit cards, auto loans, and home equity lines—but not directly 30-year fixed mortgages.

Mortgage rates follow bonds, Not the Fed. Mortgage rates are tied to the bond market, specifically mortgage-backed securities. They rely on the benchmark 10-year U.S. Treasury yield—the interest rate the U.S. government pays to borrow money for 10 years. That yield is influenced by a complex mix of factors like inflation, unemployment, and economic growth forecasts.

Mortgage rates reflect long-term expectations. Rates on a 30-year mortgage are based on investors' expectations for the economy and inflation over the next decade, not just on the Fed's near-term actions.

Sometimes rates move in the opposite direction. So, while Fed decisions can put indirect pressure on long-term rates, mortgage rates don't move in lockstep. In fact, last fall when the Fed cut interest rates, mortgage rates jumped by a full percentage point because investors feared higher inflation and pulled money out of bonds.

Source: Shelly Ave
SVP of Mortgage Lending
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