What You Should Know About Fed Moves and Mortgage Rates

When the Federal Reserve makes headlines about interest rate decisions, many homeowners and buyers immediately wonder: How will this affect mortgage rates? The truth is more nuanced than the headlines suggest. While the Fed plays an important role in shaping financial markets, mortgage rates don’t always move in lockstep with Fed actions. Here’s what you should know.

1. The Market Often Prices in Cuts Before They Happen

By the time the Fed officially announces a rate cut, the market usually isn’t surprised. Why?

• The Fed often hints at its intentions well before making a move.

• Economic conditions can make a rate cut feel all but inevitable.

• Bond traders frequently price in their expectations weeks ahead of official announcements.

Because of this, mortgage rates often adjust before the Fed actually cuts rates. When the cut finally comes, markets may barely react—or sometimes move in unexpected directions. In rare cases, if a cut is seen as fueling inflation, mortgage rates could even rise instead of fall.

Key takeaway: Waiting for a Fed cut isn’t always the best strategy if you’re trying to time mortgage rates.

2. The Fed Doesn’t Directly Control Mortgage Rates

A common misconception is that the Fed “sets” mortgage rates. In reality, the Fed controls only the short-term Fed Funds Rate, which is the overnight rate banks charge each other to borrow money.

Mortgage rates, however, are long-term rates. They move based on broader market forces and can behave very differently than the Fed Funds Rate. For example, in the first two-thirds of 2024, mortgage rates dropped by nearly a full percentage point—even though the Fed didn’t move its rate at all.

Key takeaway: The Fed influences, but does not dictate, mortgage rates.

3. Mortgage Rates Depend on More Than the Fed

Ultimately, mortgage rates are shaped by the bond market. Investors demand higher yields when they expect strong growth and inflation, which drives mortgage rates up. When growth slows or inflation cools, investors settle for lower yields, and mortgage rates can decline.

That’s why bond traders track a wide range of economic indicators, including:

• Inflation reports: CPI, PPI, and PCE

• Growth signals: GDP data, employment numbers, consumer sentiment, manufacturing, retail sales, and housing starts

In many cases, these factors have more influence on mortgage rates than the Fed itself.

Key takeaway: Mortgage rates are a reflection of economic expectations, not just Fed decisions.

Final Thoughts

Fed announcements dominate headlines, but mortgage rates move according to a broader set of forces—bond markets, inflation expectations, and economic data. For buyers and homeowners, the important lesson is this: don’t assume a Fed cut (or pause) will automatically bring mortgage rates down.

If you’re considering a purchase or refinance, focus on the bigger picture and lean on professional guidance to navigate the timing.