As many of you know, several weeks ago the Federal Reserve, under Chairman Jerome Powell, announced a quarter-percent cut to its key interest rate, the first of 2025. Both in announcing this cut and in later remarks, Powell emphasized that the Fed intends to move cautiously, balancing the risk of cutting too quickly and reigniting inflation against the risk of keeping rates too high and slowing the job market.
What has surprised many is that mortgage rates have actually risen since this cut. Perhaps you found yourself wondering why. The reason is that mortgage loans are typically long-term fixed-rate loans, lasting 15 or 30 years. Because they must remain viable through many market cycles, their rates are tied more closely to long-term benchmarks like the 10-year Treasury yield, rather than the Fed’s short-term rate.
We saw a similar pattern in late 2024 when mortgage rates rose even as the Fed initiated a series of rate cuts. As was the case in both of these examples however, often, mortgage rates begin to fall in advance of a Fed move as investors anticipate the cut. But if the Fed delivers less than markets hoped for, or signals it may not cut further, investors can quickly adjust. That adjustment pushes Treasury yields, and therefore mortgage rates, higher, even when the Fed has just lowered its rate.
So, if a Fed cut doesn’t necessitate lower mortgage rates, what does? The main drivers are broader economic forces shaped by supply and demand. When investors fear the economy is slowing, they often shift money into safer assets like U.S. Treasuries. That extra demand lowers bond yields, which in turn pulls down mortgage rates with it. A weaker economy can also reduce overall borrowing, reinforcing that downward pressure.
Housing demand also plays a role. When the housing market is strong, lenders have less need to compete on rates, but when demand cools, they often lower rates to attract buyers. In this way, mortgage rates reflect both the health of the economy and investor expectations, sometimes moving in a very different direction than Fed policy.
While many hope the Fed’s recent rate cuts will help boost the economy, the impact on housing affordability may be far less than expected. For potential homebuyers, this means that while rate cuts may support growth in other areas, they may not deliver the relief many were counting on when it comes to making homeownership more affordable. Remember, in the end, long-term mortgage rates are set by markets, not meetings.
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations)