Why Are Mortgage Rates Up If the Fed Is Cutting Its Rate?

If you’re thinking about buying a house, you’re no doubt hoping mortgage rates will come down. Inflation has eased, and the Federal Reserve has started cutting its benchmark interest rate, right?

Yes, but the benchmark fed funds rate is not what drives mortgage rates — not directly anyway. And since the Fed’s last rate cut in December, the average 30-year mortgage rate has actually ticked higher, topping 6.9%, according to the latest national survey by Freddie Mac. This makes buying even more expensive than it was during the pandemic, when many could get a mortgage below 3%.

So why the disconnect? Because unlike rates for credit cards and many other loans, mortgage rates are tied to the bond market. Specifically, they follow the yields on 10-year Treasury bonds.

That makes investors the real driver of mortgage rates, and when it comes to bonds, it’s all about their expectations for inflation. When the risk of inflation rises, investors demand higher interest rates to compensate. And although inflation has subsided a lot since 2022, there’s still a lot of uncertainty about it. It’s even gotten a little worse, not better, in the past few months.

(Mortgages are also bundled and sold to investors as bonds, which adds a whole other layer to the rate equation. Here’s more about that if you want to get into those weeds.)

Ultimately, inflation risk is how the Federal Reserve ties back to mortgage rates. Because the Fed uses the fed funds rate to control inflation, investors are always reading Fed tea leaves. A speech from a Fed official or fresh data or news (like a presidential election) can change investor perceptions. Case in point: Over the past few years, look how much mortgage rates moved even when the fed funds rate didn’t change.

So what? Mortgage rates remain high because inflation remains unpredictable. Less than two years ago economists had forecast 30-year rates would be in the 4% range by now. Now they see something closer to 6.5% over the next few years.

While this is keeping the American dream of owning a home out of reach for many, the National Association of Realtors® reports that some prospective buyers seem to be starting to adapt. If you think you might be one of them, check out our Deep Dive on less conventional mortgage types. The math may surprise you.

Related Reading

•   The ‘Hidden Force’ That Can Bring Mortgage Rates Down (The Wall Street Journal via MSN)

•   Here’s Where Mortgage Rates Could Be Headed in 2025 (The Hill)

•   7 Ways to Secure a Lower Interest Rate Mortgage (SoFi)

photo credit: iStock/ArLawKa AungTun

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