Fed’s Rate Cut: Expectations and Disappointments

The Federal Reserve is preparing for another interest rate cut, with traders seeing an 85% probability of a move in September. While such a reduction typically lowers short-term borrowing costs, the link to mortgage rates is indirect.

Unlike credit cards or home equity lines of credit, 30-year fixed mortgage rates are more influenced by bond yields and market expectations than by Fed policy alone.

Last year, when the Fed cut rates, mortgage rates actually rose, leaving homebuyers frustrated.

As economic data on inflation, hiring, and other factors continue to emerge, borrowers and refinancing clients may face unpredictable swings in rates, despite the Fed’s expected actions.

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Key Takeaways

1. Fed rate cuts are unlikely to immediately lower mortgage rates, which depend more on bond yields than short-term interest rates.

2. Market expectations are already priced in, so rates may not drop further even if the Fed cuts in September.

3. Buyers should focus on affordability, rather than attempting to perfectly time mortgage rate movements.

Why Mortgage Rates Don’t Always Fall with Fed Cuts

Mortgage rates do not directly track the Fed’s benchmark interest rates. Instead, they are tied closely to the 10-year Treasury yield, which reflects market sentiment about inflation, government borrowing, and economic growth.

When the Fed cuts rates, it primarily impacts short-term borrowing costs like credit cards, auto loans, and home equity lines.

How the Market Reacts

1. Mortgage rates are influenced by bond investors’ expectations of future inflation.

2. Long-term yields may rise even when the Fed cuts, as seen last year when rates increased despite a 50 basis point reduction.

3. Mortgage spreads, the difference between the 10-year Treasury and prevailing mortgage rates, also vary based on volatility and demand for mortgage-backed securities.

Industry professionals say this disconnection can frustrate clients. Loan originators like Taylor Sherman report that buyers often wait for lower rates, not realizing that the market already factors in the Fed’s expected cuts.

David Gottlieb, a wealth manager, stresses that the Fed only exerts indirect pressure on mortgage rates, making predictions difficult.

Read Also: Trump Says US Rate Cut Will Happen in September! Is It True?

Current Market Expectations and Volatility

Analysts project the Fed may reduce rates in September 2025, yet mortgage rates are already near their year-to-date lows at 6.58%.

These rates reflect the market’s expectations, including upcoming economic data on hiring and inflation.

Mortgage rates can oscillate quickly as new reports arrive, creating uncertainty for buyers and refinancers.

Factors Driving Volatility

1. Weak jobs data in August contributed to lower rates earlier this month.

2. Producer and consumer inflation reports could push rates higher if prices climb unexpectedly.

3. Tariffs and trade developments may influence inflation, affecting long-term yields.

Some homebuyers now have more purchasing power. For instance, Redfin reports that buyers with a $3,000 monthly budget can afford around $20,000 more than in May when rates peaked over 7%.

However, trying to time the market may backfire, as seen last year when homeowners waited for rates to drop and missed out on potential savings of $300 to $400 per month.

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Strategic Advice for Buyers and Borrowers

While rate cuts are expected, borrowers must consider overall affordability rather than chasing small fluctuations.

Mortgage professionals advise focusing on monthly payments, financial readiness, and loan terms instead of predicting the next rate swing.

Practical Tips

1. Compare mortgage offers from multiple lenders to secure competitive terms.

2. Factor in potential future rate volatility and lock in rates when comfortable.

3. Monitor economic indicators but avoid basing decisions solely on Fed announcements.

Economists like Chen Zhao suggest that the economy does not appear weak enough for aggressive Fed cuts, which means mortgage rates may remain close to current levels for some time.

Supersized cuts could even trigger market reactions that temporarily raise rates, as bond investors respond to perceived risks.

Mortgage market observers point out that last year’s experience serves as a cautionary tale. When the Fed cut 50 basis points, 10-year Treasury yields rose sharply, pushing mortgage rates higher instead of lower.

Bond vigilantes, investors wary of monetary easing, can continue to influence rates independently of the Fed’s policy moves.

Read Also: What is Interest Rate Cuts? Complete with Examples

Conclusion

The Federal Reserve’s anticipated rate cut in September is unlikely to guarantee lower mortgage rates.

Long-term home loan rates are driven by a mix of bond yields, inflation expectations, and market sentiment.

Borrowers should focus on overall affordability and monthly payments rather than trying to perfectly time Fed actions.

Waiting for rates to fall further may lead to missed opportunities, as seen in past cycles.

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FAQ

Will the Fed’s September rate cut lower mortgage rates?

Not necessarily. Mortgage rates are influenced primarily by 10-year Treasury yields and market expectations, so Fed cuts only have an indirect effect.

Why did mortgage rates rise after previous Fed cuts?

Long-term rates often respond to investor sentiment and inflation expectations. When the economy looks stronger than anticipated, rates may rise even after a cut.

Should homebuyers wait for lower rates?

Waiting can be risky. Mortgage rates are volatile, and trying to time the market may result in missed savings opportunities. Focus on affordability instead.

How are mortgage rates different from credit card or HELOC rates?

Credit cards and home equity lines are tied to the prime rate and respond quickly to Fed changes. Mortgages rely on longer-term bonds and market conditions.

What factors influence mortgage rates the most?

Key drivers include 10-year Treasury yields, inflation expectations, economic growth, market volatility, and demand for mortgage-backed securities.

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