Do Fed Rate Cuts Really Affect Mortgage Rates?

Fed rate cuts. Do they really affect mortgage rates? Spoiler: it’s not as direct as you might think.

You’ve probably heard the news: the Federal Reserve cut interest rates finally. And right after that, someone on TV probably said, “That’s great news for mortgage rates!”

But here’s the thing — that’s not exactly how it works. The Fed doesn’t actually set mortgage rates.

The Fed’s Rate vs. Mortgage Rates: Two Different Things

When people talk about the Fed cutting rates, they’re talking about the federal funds rate. That’s the short-term rate banks use when they lend money to each other overnight.

That rate affects things like credit cards, personal loans, and home equity lines of credit (HELOCs) — loans that are usually short-term or have variable rates.

Mortgage rates, on the other hand, are long-term. They move differently.

What Really Drives Mortgage Rates

Mortgage rates follow something called the 10-year Treasury yield — basically, what the government pays to borrow money for 10 years.

When investors are confident about the economy, they usually want higher returns, so Treasury yields (and mortgage rates) go up. When investors get nervous and want a safe place to park their money, they buy more Treasuries, which pushes yields (and mortgage rates) down.

So while the Fed’s actions might influence how investors feel about the economy, the connection to mortgage rates is indirect.

Why a Fed Rate Cuts Might Not Lower Your Mortgage Rate

Sometimes when the Fed cuts rates, people expect mortgage rates to drop immediately. But that’s not always what happens.

If the Fed cuts rates to fight a slowing economy, investors might see that as a bad sign and move money into safer investments — and that can make mortgage rates fall. But if the rate cut sparks fears of inflation later, mortgage rates can actually rise.

It all depends on how investors interpret the Fed’s move and what they think the economy will do next.

The Bottom Line

The Fed’s rate cuts don’t directly change mortgage rates, but they do influence the overall economic mood — and that can cause rates to move up or down.

So if you hear about a Fed rate cut and wonder what it means for your mortgage, remember: the Fed doesn’t pull that lever directly. The bond market does.