Last week, the Federal Reserve announced a widely anticipated interest rate cut, lowering the federal funds rate by a quarter of a percentage point to a target range of
4.00%–4.25%, which is
the first cut since December 2024. Many people thought:
“Great! Mortgage rates will drop, too.”
Instead, the opposite happened; mortgage rates ticked
up,
rising roughly 0.125% to 0.25% in the days following the announcement. At first glance, that feels contradictory. Shouldn’t cheaper borrowing from the Fed mean more affordable home loans for buyers? Unfortunately, the reality is more complex.
The Fed Doesn’t Directly Control Mortgage Rates
First, it’s important to clear up a common misconception that the Fed sets mortgage rates.
That’s not true.
The Fed only controls the short-term rate banks charge each other
to borrow money overnight.
Mortgage rates are different. They’re influenced more by
the long-term bond market, especially the 10-year U.S. Treasury yield.
Think of it this way:
mortgage lenders watch what investors are willing to pay for long-term bonds, and they price home loans in a similar way. If investors demand higher returns on those bonds, mortgage rates go up, too.
So, Why Did the Rates Rise After the Fed Cut?
Markets usually anticipate Fed moves well before they happen. In the weeks before the Fed’s September cut, mortgage rates had already fallen to their
lowest level in nearly a year, around
6.35% for the average 30-year fixed mortgage. By the time the Fed actually announced the cut, investors had already priced it in.
So, what happened next? Investors started worrying about things like sticky inflation and how quickly (or slowly) the Fed might cut rates again in the future. Those worries pushed the yield on long-term bonds higher, and mortgage rates followed. In other words, it wasn’t the Fed’s action itself that caused mortgage rates to rise; it was how the market reacted to the bigger picture.
What This Means for Homebuyers and Homeowners
Here’s the bottom line:
a Fed rate cut doesn’t guarantee lower mortgage rates. Mortgage rates move based on a mix of factors:
- The 10-year Treasury yield (a key benchmark for long-term borrowing).
- Inflation expectations (if inflation looks like it will stick around, investors want higher returns).
- The market for mortgage-backed securities (how much risk investors are willing to take on housing debt).
- Overall economic outlook (jobs, growth, and market confidence).
That’s why sometimes mortgage rates rise when the Fed cuts, and sometimes they fall.
Clearing Up a Few Myths
Myth: Fed cut means lower mortgage rates.
Reality: Mortgage rates often rise right after a cut if markets expect higher inflation or stronger growth.
Myth: Short-term and long-term rates always move together.
Reality: They frequently diverge. Mortgage rates reflect long-term expectations, not just today’s Fed decision.
Myth: Waiting for “the next Fed cut” guarantees better mortgage terms.
Reality: Timing the market is risky; rates can swing daily based on investor sentiment and economic news.
Looking Ahead
Going forward, mortgage rates will likely move more based on inflation reports, jobs data, and bond market trends than on Fed decisions alone. If inflation cools and bond yields drop, rates could drift lower again, too. But if investors remain cautious, rates may stay higher for longer, even with more Fed cuts on the horizon.
For now,
the best strategy is to stay informed and be ready to act if you see a mortgage rate that works for your situation. Small shifts, like the 0.125% to 0.25% bump we saw last week, can add up over the life of a loan. Locking at the right time can save thousands, regardless of what the Fed is doing.
Have questions about how the Fed’s moves affect your homebuying plans? Our team is here to simplify the numbers and
help you plan ahead.
