The Fed cuts rates by a quarter of a point

The Federal Reserve had its first rate cut since last year on September 17 hoping to boost the slowing job market. Federal interest rate adjustments are there to encourage lending, boost investments and consumer spending making the borrowing more affordable.

There is a common misconception that the Fed rate drop will be directly reflected in the mortgage rates that control the real estate markets and home buying power.

These rates do not work in parallel.  The mortgage rates declined recently but it is not guaranteed they will continue declining even as the central bank is signaling more cuts coming this year. The Fed’s actions can influence mortgage rates, but there is not a one-to-one relationship. Let’s take a look how the mortgage rates are set.

How mortgage rates typically respond to Fed rate cuts

Here’s how things tend to play out:

1. Long vs. short rates

   Mortgage rates for long term fixed mortgages (30-year fixed, 15-year) are more influenced by long-term bond yields (10-year Treasury yield) and by expectations for inflation, economic growth, and risk.
   Fed rate cuts affect short rates more directly, which can visibly influence adjustable-rate mortgages (ARMs) and variable rate products.

2. Expectations matter

   Sometimes mortgage rates fall before a Fed cut, because markets expect cuts and adjust in advance. Sometimes rates rise after a cut if markets were expecting bigger cuts, or fear inflation or other risks.

3. Spreads and risk premiums

   Mortgage rates include a risk premium over Treasuries or other benchmarks. If investors think there’s more inflation risk, or more risk in the housing market or broader economy, those premia widen — meaning even if the Fed cuts, mortgage rates may not fall much or they can even increase over time.

What has been happening recently

Recent data and commentary suggest the following market response:

• The Fed cut its benchmark rate by 25 basis points (0.25%) to a range of about 4.00-4.25% in mid-September.
• Following this cut, average 30-year fixed mortgage rates have moved downward somewhat; reports indicate they have fallen to approximately 6.35% in some surveys, among the lowest in nearly a year.
• Refinancing demand has increased since mortgage rates have dipped but as a result of many rate drops, not the recent Fed cuts.

Why mortgage rates don’t always fall much (or immediately) after Central Bank adjustment?

As we mentioned before, the Fed rate cuts don’t reflect parallel results in the mortgage rates as they are dependent on multiple other factors:

• Expectations for future inflation: If inflation is expected to stay elevated, bond investors demand higher yield to compensate. That pushes up long-term rates, which in turn keeps fixed mortgage rates high.
• Credit risk and economic uncertainty: If investors worry about economic slowdown, defaults, or market instability, they might require higher risk premiums.
• Lag effects: It takes time for changes in Fed policy to work their way through banks, mortgage lenders, and financial institutions. Mortgage rate adjustments don’t happen instantly.
• Spread between Treasury and mortgage rates: Even if Treasury yields fall, if the spread (margin) doesn’t tighten, mortgage rates won’t fall as much.

What does this mean for homebuyers & homeowners

For people considering buying, refinancing, or holding mortgages, here is what you can expect:

1. If you have an Adjustable Rate Mortgage (ARM) you may see some relief in monthly payments as the Fed cuts influence these types of products more directly.
2. For homeowners or buyers looking at a fixed-rate mortgage you may see a small adjustment (we recorded -0.09 point drop in the last week) but this result is not significant enough to affect the real market.
3. Home equity line of credit (HELOC) is one of the few products that responds to Fed rate cuts.  Because HELOC is based on the value of your home, it works similarly to a credit card because there is a borrowing ceiling and the rate is variable. If you have a HELOC loan, you will see the rates decline soon even by the entire 0.25 points.
4. Refinancing might make sense if your current fixed-rate mortgage has a rate much higher than what’s now available, refinancing could save substantial interest over the lifetime of the loan, provided the closing costs aren’t prohibitive.
5. Watch your timing & expectations because much of the markets react ahead of announcements and sometimes waiting a bit might be a good strategy.  Don’t wait too long as the result of a cut may drive further inflation causing rates to go up again.  It’s a constant balance of predictions, market behavior and consumer spending.
6. Lower mortgage rates tend to increase demand, which can push up home prices (especially in desirable areas with low supply). That means that even if your monthly payments are lower, the purchase price may be higher.

What to watch as we move ahead in 2025

To understand where mortgage rates might go next, watch these key indicators:

• 10-Year Treasury yield — one of the more direct drivers for fixed mortgage rates.
• Inflation data — e.g. CPI, PPI, core inflation. If inflation is stubborn, rate cuts may be limited and long rates may stay high.
• Fed communications & projections — what the Fed signals about future rate cuts, economic outlook, employment, inflation.
• Economic growth & labor market — especially unemployment trends, consumer spending. Weak growth might push for cuts; strong growth might keep pressure up.
• Demand for mortgage-backed securities — both from domestic and foreign investors.

For borrowers, the lower Fed rates can affect the overall long-term mortgage rates, but the predictions of further cuts can have even bigger impact. Housing market rates in the past few years have been some of the highest in decades causing a cool down in the real estate market and preventing many first-time buyers from being able to afford a home.