Fed cuts rates at September 2024 meeting. Mortgage interest rates expected to drop in response

The Federal Reserve’s policies play a major role in shaping mortgage rates, but the relationship between the two can be a bit complicated. While the Fed doesn’t directly control mortgage rates, the decisions it makes—particularly regarding the federal funds rate—have a ripple effect across the economy, impacting borrowing costs, including home loans.

When the Fed raises the federal funds rate, it becomes more expensive for banks to borrow money. Banks then pass on those costs to consumers, which typically results in higher mortgage rates. This was evident in early 2022, when the Fed began tightening monetary policy to combat inflation, which pushed mortgage rates up from historic lows. On the flip side, during periods of economic uncertainty, like the 2008 financial crisis or the COVID-19 pandemic, the Fed has cut rates and purchased large amounts of mortgage-backed securities to encourage borrowing and keep mortgage rates lower​ (NerdWallet: Finance smarter)​(Investopedia). However, mortgage rates don’t just follow the Fed’s actions in a vacuum. They are also heavily influenced by the bond market, particularly the yield on 10-year Treasury notes, which often tracks economic conditions in real-time. Mortgage rates often mirror these movements because mortgage-backed securities compete for the same investors as Treasury bonds. So, if bond yields rise due to economic optimism, mortgage rates tend to follow suit. Even when the Fed cuts rates, other factors, such as economic growth or job creation, can cause mortgage rates to rise unexpectedly​ (Investopedia) .For instance, we recently saw a case where the Fed cut interest rates, but mortgage rates rose instead. The bond market had already priced in the Fed's move, and strong economic data—like an increase in housing starts—led to higher bond yields, pushing mortgage rates up​ (HousingWire) This highlights the complex relationship between the Fed, the bond market, and mortgage rates.

For anyone buying a home or investing, understanding these factors is critical. Keeping an eye on both Federal Reserve actions and broader economic indicators—like job growth, inflation, and housing permits—can provide a clearer picture of where mortgage rates might be headed. It’s not just about following the Fed’s rate decisions but also understanding how the market interprets these moves and reacts to economic signals. This insight can help you time your investment or home purchase for when mortgage rates are more favorable.