The Fed has cut rates three times recently, but mortgage rates haven’t gone down much. They seemed to dip to around 5.5% in September but didn’t stay there. Can someone explain why mortgage rates aren’t moving down like I expected?
Mortgage rates follow the 10-year Treasury yield, not the Fed’s rate cuts. Both are affected by inflation, economic growth, and market risk. The Treasury yield reflects investor demand for lending money to the government, and mortgage-backed securities (MBS) compete with Treasuries for investors. When Treasury yields rise or fall, MBS yields adjust, which influences mortgage rates.
Mortgage rates are generally higher than the Treasury yield because they carry more risk, such as borrower defaults. Rates also depend on supply and demand in the housing market, but the bond market is the primary driver. So even if the Fed cuts rates, mortgage rates may not move in the same direction.
@Drew
Thanks for the clear explanation! Do you have any book recommendations for learning more about this?
Hayes said:
@Drew
Thanks for the clear explanation! Do you have any book recommendations for learning more about this?
You might like ‘The Ascent of Money’ by Niall Ferguson. I also read a lot of finance articles just out of personal interest.
@Drew
This is the clearest explanation I’ve read in months. Thanks for breaking it down!
@Drew
I work in mortgage servicing and attended a panel with economists who explained that even if the Fed cuts rates, other factors like tariffs and government policies could keep mortgage rates stable or even push them higher.
@Drew
Mortgage rates aren’t directly tied to the 10-year Treasury. They follow it but are influenced by MBS (mortgage-backed securities), which are traded on the market.
Jody said:
@Drew
Mortgage rates aren’t directly tied to the 10-year Treasury. They follow it but are influenced by MBS (mortgage-backed securities), which are traded on the market.
Thank you, but the distinction between ‘tied’ and ‘follow’ doesn’t change the overall point much.
The Fed only controls short-term rates, like those up to about two years. Mortgage rates are influenced by long-term market forces instead.
Yan said:
The Fed only controls short-term rates, like those up to about two years. Mortgage rates are influenced by long-term market forces instead.
Exactly. The Fed Funds Rate impacts short-term rates, but long-term rates reflect market expectations for future conditions. The Fed can guide near-term expectations, but its influence on long-term rates is limited.
The Fed rate cuts don’t directly affect mortgage rates. Mortgages follow the 10-year Treasury yield. Strong economic indicators like low unemployment and solid retail spending have kept Treasury yields up, and lenders had already priced in the Fed’s rate cuts earlier in the year.
@Bret
It’s wild to me that the economy is considered healthy when prices are sky-high, and so many people are struggling with their budgets.
Teo said:
@Bret
It’s wild to me that the economy is considered healthy when prices are sky-high, and so many people are struggling with their budgets.
Wages have also gone up, which balances things out somewhat. Many people have always had to budget carefully; this just feels more noticeable now.
@Bret
I guess it depends on the industry. In my case, wages haven’t kept up with inflation, so it feels like we’re falling behind.
The market is concerned about persistent inflation and rising government deficits, which are keeping long-term rates high. Mortgage rates are unlikely to drop significantly as long as these concerns remain.
@Harlan
Inflation and tariffs are also big factors. Policies like these could keep rates high or even push them up further.
@Harlan
If these concerns lead to a recession, wouldn’t mortgage rates drop as demand falls and the Fed cuts rates more aggressively?
Meade said:
@Harlan
If these concerns lead to a recession, wouldn’t mortgage rates drop as demand falls and the Fed cuts rates more aggressively?
Recessions don’t always lead to lower mortgage rates. Factors like inflation or other economic risks can keep rates high even during downturns.
Mortgage rates are long-term rates influenced by market expectations. When the Fed signals it might not cut rates much further, it raises expectations for higher long-term rates, which pushes mortgage rates up.
The Fed Funds Rate affects short-term rates, like those for overnight bank loans. Mortgage rates, which are long-term, are more influenced by the 10-year Treasury yield and inflation expectations.