Think the Fed Controls Mortgage Rates? Here’s the Truth

1. Mortgage Rates Follow the Bond Market, Not the Fed

Many people assume the Fed directly controls mortgage rates, but that’s a common misconception. Mortgage rates are actually tied to the 10-year Treasury yield, which moves based on inflation, investor confidence, and economic conditions.

"Mortgage rates tend to follow the bond market, and the bond market follows inflation," says Lawrence Yun, Chief Economist at the National Association of Realtors.

When investors expect inflation to rise, they demand higher returns on bonds, pushing mortgage rates up—even if the Fed cuts rates. In 2023, mortgage rates remained above 7% despite multiple Fed rate cuts—proving that lower Fed rates don’t always mean lower mortgages.

2. Banks Are Playing It Safe—And That’s Costing You.

Even when the Fed lowers interest rates, lenders don’t immediately pass the savings onto borrowers. Banks consider multiple risk factors before setting mortgage rates, including:

Future inflation expectations
Loan demand vs. available funds
Risk of borrower defaults

Right now, lenders are being extra cautious, keeping mortgage rates higher to protect against financial uncertainty. This means even though the Fed is lowering rates, your mortgage lender isn’t in a rush to do the same.

3. Short-Term Rate Cuts Won’t Fix Long-Term Mortgage Costs.

The Federal Reserve controls short-term interest rates, like those on credit cards, auto loans, and bank-to-bank lending. Mortgage rates, on the other hand, are based on long-term lending markets.

Historically, mortgage rates don’t drop significantly until inflation is under control and investor confidence in the economy stabilizes. According to Freddie Mac, mortgage rates are more closely tied to the 10-year Treasury yield, which fluctuates based on investor sentiment. So, even if the Fed cuts rates today, mortgage rates might not follow for months—or even years.

4. High Buyer Demand Means Lenders Can Keep Rates High.

Mortgage rates drop when demand for loans decreases. But in today’s market, homebuyers are still purchasing, even with higher rates.

Why? Because housing inventory remains tight, keeping home prices high and demand steady. Until home sales slow dramatically or economic uncertainty scares buyers away, lenders don’t have an incentive to slash rates.

5. How to Get the Best Mortgage Rate Anyway.

Waiting for the perfect interest rate could mean missing out on a great home. Instead of sitting on the sidelines:

Explore homebuyer down payment assistance programs – North Carolina offers various programs to help first-time buyers and veterans with down payments and closing costs.
Utilize VA Loans – Veterans and active-duty military members may qualify for VA loans, which require zero down payment and have competitive interest rates.
Consider a rate buydown – Many sellers and lenders offer rate buydown programs to help reduce your mortgage rate for the first few years.

Mortgage rates are unpredictable, but one thing is clear: waiting for the Fed to cut rates won’t guarantee a lower mortgage rate anytime soon. If you’re serious about buying a home, focus on what you can control—your budget, loan options, and strategy.