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What the Federal Reserve’s Interest Rate Cut Really Means for Your Mortgage

Thursday, January 02, 2025

What the Federal Reserve’s Interest Rate Cut Really Means for Your Mortgage

My wife Alejandra and I are planning to buy another property soon, so naturally, I reached out to my banker, Mike, to check on mortgage rates. He told me they’ve jumped this week, landing at around 7.25% for a new mortgage.

At the same time, I’d heard the Federal Reserve announced a 0.25% interest rate cut (December 20, 2024). Thinking this was great news, I asked Mike, “Does this mean mortgage rates will come down too?”

Mike’s response surprised me:

👉 "Not exactly. The Fed Funds rate and mortgage rates aren’t directly linked."

The Difference Between the Fed Funds Rate and Mortgage Rates

The Fed Funds rate and mortgage rates are not the same.

The Fed Funds rate is the short-term rate at which banks borrow money overnight.

Mortgage rates are set by the market, and are heavily influenced by the 10-year Treasury Note interest rate.

Both mortgage rates and 10-year Treasury Notes are considered long-term investments, so they tend to move together. Here’s where it gets interesting:

When the economy is strong and the stock market is performing well, investors are less likely to put money into Treasury Notes, pushing their rates (and mortgage rates) higher. But in a slower economy, investors look for safer bets, like Treasury Notes, which can lower their rates and mortgage rates.

That is why the Fed Funds rate and mortgage interest rates are not alway going in the same direction.

Understanding Mortgage Trends

During my reseach I found this chart in an article written by economist Matt Graham - https://housingnewsletters.com/mgraham/675cbb241163134e984b795b

From late 2023 until Summer of 2024, while the Federal Reserve held the Fed Funds rate steady, mortgage rates went down.

Later on in 2024, when the Fed started cutting rates, mortgage rates climbed higher.

This is a reminder that mortgage rates don’t follow the Fed’s announcements in a straight line. They’re influenced by market forces, investor confidence, and economic trends.

The Impact of Inflation

The U.S Government look at the economy and at inflation rates to predict what the future outlook of the economy will be, they attempt to influence the economy by modifying the Fed Funds rate and by issuing long term treasury bonds.

If inflation is high this is a major concern, therefore one way to keep inflation rates from increasing is to maintain higher interest rates.

What This Means for Buyers

If you’re considering buying a home, don’t just rely on headlines about Fed rate changes. It’s important to understand the bigger picture and work with a trusted advisor who can help you navigate the current market.

If you’d like to chat more about how this impacts your buying journey, feel free to reach out—I’m always happy to help!