The Federal Reserve is poised to lower its benchmark interest rate this week for the first time since December 2024. Such a decision would provide some relief to Americans struggling with loan costs, but its immediate effect on mortgage rates remains uncertain. Currently, the average rate for a 30-year fixed-rate mortgage has dipped to 6.35%, the lowest in nearly a year, largely influenced by market expectations of the Fed’s upcoming move. Similarly, rates on 15-year fixed-rate mortgages, which are often favored by homeowners looking to refinance, have decreased slightly from 5.6% to 5.5%.
Despite this downward trend, experts caution that homeowners might not see a significant drop in mortgage costs immediately following an official Fed rate cut. Understanding the relationship between monetary policy and mortgage rates requires looking at how the Fed’s decisions influence various economic factors.
The Federal Reserve’s impact on mortgage rates is indirect. It primarily sets the federal funds rate, which governs how much banks charge each other for overnight loans. According to Jake Krimmel, a senior economist at Realtor.com, while the Fed influences short-term interest rates, mortgage rates are more aligned with long-term interest rates, particularly those linked to the bond market, such as the 10-year Treasury note. The yields on these bonds, rather than the Fed’s rate cuts, play a more significant role in determining mortgage loan pricing.
Adjustable-rate mortgages (ARMs) are more directly influenced by changes in the federal funds rate, as they are tied to the Secured Overnight Financing Rate (SOFR). In contrast, fixed-rate mortgages, which typically have terms of 15 to 30 years, are influenced more by investor sentiment and long-term economic projections.
Over the past year, yields on the 10-year Treasury note have experienced fluctuations due to various economic concerns, including tariffs and potential legislative changes. Analysts, including Stephen Kates from Bankrate, emphasize that factors such as inflation expectations and overall market conditions significantly affect mortgage rates.
In light of anticipated Fed action, lenders have proactively reduced rates over the past several weeks. Data shows that the average rates for both 30-year and 15-year mortgages have already seen declines as a response to signals from Fed Chair Jerome Powell and other central bank officials about the likelihood of a rate cut. Historical trends indicate that similar preemptive rate reductions have occurred before significant Fed actions, as seen in September 2024 when mortgage rates fell to a two-year low ahead of an unprecedented 0.50 percentage point cut.
However, Fed interest rate policy is only one element influencing mortgage costs. Other factors, such as inflation rates, job growth, consumer spending, housing demand, and external events, also play critical roles. Krimmel notes that the Fed Chair’s remarks regarding future monetary policy could significantly impact the housing market, potentially more than the actual rate cut itself. Expectations and forecasts often drive market behavior, making the anticipation of future policies and remarks from the Fed a crucial component in shaping mortgage rates.
