It's a common question brokers face: Why don't borrowing costs always fall when the central bank lowers its own rate?
The Federal Reserve lowered its funds rate for the first time this year on Wednesday – but even with that quarter-point cut on Wednesday, the average 30-year mortgage rate went up instead, showing just how unpredictable the mortgage market can be.
The Fed’s decision to lower its benchmark rate to a range of 4% to 4.25% arrived amid growing concerns over the labor market and weakening economy. However, 10-year US Treasury bond yields climbed immediately after that move, causing the average 30-year fixed mortgage rate to tick upwards.
That may have rekindled a familiar conversation for mortgage professionals with their clients. "The conversation comes up a lot: they heard rates dropped, the Fed cut rates, mortgage rates are falling out of the sky. It’s not true – but we have to educate," Texas-based broker Hunter Bolling told Mortgage Professional America this year.
Mortgage rates are not directly set by the Fed. Instead, they are largely determined by the bond market, particularly the 10-year Treasury yield. Lenders use this yield as a benchmark for pricing home loans, and it has been trending higher since the Fed’s move. Last year showed that mortgage rates don’t always move with the Fed’s benchmark. From mid-September to mid-December, the Fed cut its rate three times by a total of 50 basis points, but the average 30-year fixed mortgage still climbed from 6.09% to 6.85%.
Bond market drives mortgage rate direction
The 10-year Treasury yield rose from 4.04% on September 16 to 4.11% on September 18, and continued climbing to 4.14% by September 19. That’s a 10 basis point jump in just a few days, and the highest level in two weeks. Even though the Fed lowered its benchmark rate, the 10-year yield went up as investors processed the central bank’s cautious outlook and signals that future cuts may be limited. Fed chair Jerome Powell described the cut as a “risk management” move and stressed there are “no risk-free paths” ahead.
When the 10-year yield rises, lenders typically raise mortgage rates to keep returns competitive for investors in mortgage-backed securities. That’s why, even after the Fed cut rates, the average 30-year mortgage rate moved higher, mirroring the jump in the 10-year yield.
Market volatility and housing affordability concerns
The Fed’s projections now show only two more cuts this year, a less aggressive path than many in the futures market had priced in. The bond market’s reaction reflected disappointment that the Fed was not moving faster, with investors recalibrating their expectations for both inflation and economic growth.
While mortgage rates had been easing since mid-July on expectations of a Fed cut, the housing market remains in a slump. Sales of existing homes are still at their lowest levels in nearly three decades, and affordability remains a major concern.
Mortgage rates are likely to remain volatile as markets digest the Fed’s cautious approach and recalibrate expectations. For now, mortgage professionals should prepare clients for continued uncertainty—and remind them that the Fed’s moves are only one piece of a much larger puzzle.
"I keep telling people the Fed cutting rates doesn't mean that mortgage rates will go down,” Melissa Cohn, regional vice president of William Raveis Mortgage, told Mortgage Professional America.
“Mortgage rates move on economic data, and the bond market is now saying, ‘Ho hum, basically...’ That showed a more cautious approach, and that the door is not wide open for many more cuts. Certainly not a bigger cut than a quarter-point cut."
