20. How do Fed Rate Cuts Affect Mortgage Rates?

Less than most people think.

The Federal Reserve controls just one interest rate, the federal funds rate. That’s the rate banks charge each other for very short loans, usually overnight. The Fed sets a target range for that rate, right now 3.75% to 4%, and pushes it up or down to make borrowing across the economy cheaper or more expensive.

That rate feeds quickly into other short-term borrowing: credit cards, HELOCs, adjustable-rate mortgages, construction loans and savings accounts; however, a 30-year mortgage is a much longer loan, and it follows the 10-year Treasury, not the overnight rate. (Why the 10-year and not the 30-year? Because most 30-year mortgages don’t last 30 years. People sell or refinance, usually within about seven to ten years, so investors price mortgages like 10-year bonds.)

Fed cuts can only bring mortgage rates down if they also bring the 10-year down, and that depends on whether investors believe the Fed has inflation under control. If the Fed cuts while inflation is still running hot, mortgage rates can stay flat or even go up.

We’ve seen it happen

Late 2024: The Fed started cutting in September. Mortgage rates went up anyway, from about 6.1% to about 7.1% by early November [Mortgage News Daily]. The 10-year climbed from 3.7% to 4.4% over the same stretch, as investors worried the Fed was cutting too soon.

Fall 2026: The Fed went the other way and raised rates in September for the first time in three years. Mortgage rates followed, but mostly because the 10-year was already climbing. It’s now around 5% as of October 23.

Right now, the question is backwards

Nobody should be waiting for Fed cuts. In September, the Fed’s own projections had rates rising a bit more by the end of this year and staying there through 2027. Now! That doesn’t mean mortgage rates are stuck permanently. I still expect them to drift down next year, but because inflation cools and the 10-year pulls back, not because the Fed cuts rates.

What to watch

Forget Fed meetings! Watch the 10-year Treasury. When it drops, mortgage rates follow within days. You should also pay attention to inflation reports, because they move the 10-year more than just about anything else.