Last week, the Federal Reserve made headlines by cutting interest rates for the first time since December 2024, lowering their key rate to a range of 4.00%–4.25%. That should mean lower mortgage rates, right?
Not exactly.
While many expected home loan rates to drop, mortgage rates actually inched up by about 0.125% to 0.25% in the days following the announcement. That seems backwards—but here’s what’s really going on.
The Fed Doesn’t Set Mortgage Rates
One big misconception is that the Fed directly sets mortgage rates. It doesn’t.
The Fed controls something called the federal funds rate, which is the interest rate banks charge each other for overnight loans. That’s a short-term rate—not the long-term rate used for most mortgages.
Mortgage rates are actually tied more closely to the 10-year U.S. Treasury bond. Lenders use this as a guide because it reflects what investors expect to happen with inflation, economic growth, and overall risk in the long run.
So Why Did Mortgage Rates Go Up?
Leading up to the Fed’s announcement, mortgage rates had already dropped in anticipation. Investors assumed a rate cut was coming, and rates fell to about 6.35%, the lowest in nearly a year.
But after the cut, investors got spooked by lingering inflation and uncertainty about how soon the Fed will cut rates again. That pushed long-term bond yields higher, and mortgage rates followed suit.
Bottom line: It’s not the Fed’s cut itself that moves mortgage rates—it’s how markets react to everything else going on.
What This Means for You
A Fed rate cut doesn’t guarantee a better deal on a mortgage. In fact, mortgage rates can rise if:
- Inflation is expected to stay high
- The economy is stronger than expected
- Investors demand higher returns on mortgage bonds
Instead of watching the Fed alone, it’s smarter to watch:
- The 10-year Treasury yield
Inflation data
Job reports and economic news
The market for mortgage-backed securities
Clearing Up a Few Myths
| Myth | Reality |
| The Fed cut = lower mortgage rates | Not always. Rates can rise if investors fear inflation. |
| Short-term and long-term rates move together | They often don’t. Mortgage rates are long-term and move differently. |
| Wait for the next Fed cut for better rates | Risky. Rates move daily and can be unpredictable. |
What’s Next?
Looking forward, mortgage rates will likely respond more to inflation, jobs reports, and bond market trends than to the Fed’s next move. If inflation comes down and investors feel confident, mortgage rates might ease up. But if uncertainty remains, expect rates to stay elevated—even if the Fed keeps cutting.
Final Thought
If you’re house hunting or thinking about refinancing, the key is to stay informed and ready to lock in when the numbers work for you. A small change in rate—even 0.125%—can mean thousands of dollars over the life of your loan.
Need help navigating it all? We’re here to simplify the numbers and help you make smart moves in any market.
Contact the Southern Home Loans today!