Unraveling the Mystery: The Relationship Between Fed Rate Cuts and Mortgage Rates

When you hear “The Fed is lowering rates,” it’s easy to assume mortgage rates will follow—but that’s not exactly how it works. Let’s break it down with a simple example.

The Fed Funds Rate is what banks charge each other for overnight loans. It’s short-term, like borrowing a cup of sugar from a neighbor, and it directly impacts things like credit cards, car loans, and savings account rates. But mortgage rates, tied to long-term loans like 15- or 30-year mortgages, are influenced by something entirely different: the bond market.

Here’s where it gets interesting. Let’s say the Fed lowers its rate to boost the economy. This move signals that the Fed is worried about slowing growth or inflation being too low. Investors might react by feeling uncertain about the future and start buying more long-term bonds (a safer investment). When demand for bonds goes up, their yields—and mortgage rates—can actually drop.

But the opposite can happen too! If investors think the Fed’s move will successfully boost the economy, they might expect inflation to rise. In that case, bond yields (and mortgage rates) could go up because higher inflation eats away at bond returns.

So, while the Fed influences the broader economic picture, mortgage rates march to the beat of their own drum. They’re shaped by investor expectations, inflation, and market trends—not just the Fed’s decisions.

Bottom line? Fed rate cuts don’t always mean lower mortgage rates. It’s all about how the market interprets the bigger picture!