While the Fed doesn't directly set mortgage rates, a rate cut often leads to lower rates — but not always. In 2024, the Fed cut rates three times (Sept, Nov, Dec), with the first 0.5% cut dropping mortgage rates to 6.12% in Oct. However, they climbed back to 6.7 – 6.9% in 2025. Here’s why:
- Fed’s Rate Decisions – Lower federal funds rates reduce banks’ borrowing costs, which can lead to cheaper loans, including mortgages and credit cards. It also cuts the cost of servicing U.S. debt (1% cut = ~$200B saved yearly).
- 10-Year Treasury Yields – Mortgage rates track Treasury yields. If lower rates signal slower growth or lower inflation, investors flock to Treasuries, pushing yields — and mortgage rates — down.
- Inflation Pressure – Rate cuts can boost spending and inflation, prompting lenders to raise rates to protect returns. Tariffs starting Aug 1 may also fuel prices, though imports are only 14% of GDP.
- Economic Health – Unemployment and growth trends heavily influence mortgage rates.
- Investor Sentiment – Expectations about future policy and the economy shape the bond market and mortgage rates.
- Mortgage Demand – Strong demand can keep rates higher despite Fed cuts.
Many factors affect mortgage rates, so a Fed cut doesn’t guarantee lower rates. However, Fed cuts do lower credit card and debt rates, leaving consumers with more disposable income, which helps.
