This past Wednesday, the Federal Reserve announced a much-anticipated rate cut, and as expected, it has sparked a lot of confusion among homebuyers and homeowners alike. Many people assume that when the Fed cuts rates, mortgage rates automatically fall. But that’s not actually how it works. Let’s clear up the difference between the Fed’s rates and mortgage rates and also take a closer look at what’s really happening in today’s market.

The Fed’s Rate vs. Mortgage Rates: Two Different Things

The Federal Reserve sets the federal funds rate, which is the short-term rate banks use to lend money to each other. This rate directly impacts things like credit cards, auto loans, and home equity lines of credit.

Mortgage rates, however, are not tied to the Fed’s rate. Instead, they’re driven primarily by the bond market – specifically, on the demand for Mortgage-Backed Securities. While the Fed’s decisions often influence investor behavior, they don’t directly set mortgage rates.  I emphasize the word “directly” because indirectly, the Fed’s actions do make a big impact – because their actions drive the financial markets to react, and these reactions often cause investors to move their investments to or from long-term, safe investments such as Mortgage-Backed Securities.

Most often, the markets anticipate what the Fed will do, so the reaction typically comes in the days or weeks before the Fed actually takes action.  So if the Fed’s action is nothing more than what was expected, the market does not react.

What Happened Before and After the Fed’s Cut

Here’s where things get interesting:

• August 22: Mortgage rates began dropping significantly – by 0.5% or more over just the next couple weeks – before the Fed even made their cut. Why?  Because on that day, the Fed signaled they were planning to cut rates in September. Investors reacted immediately, moving money into bonds, thereby increasing demand for Mortgage-Backed Securities, which drove mortgage rates lower.
• After the Fed’s Cut on Wednesday: Instead of continuing to drop, mortgage rates actually ticked up slightly (about .125%). That might feel backward, but it’s a good example of how the bond market and mortgage rates react to expectations rather than just announcements.

Even with this small increase, rates today remain much lower than they were prior to August 22 of this year.

Why Mortgage Rates Move the Way They Do

The bond market, and therefore mortgage rates, reacts to a wide range of economic factors, including:

• Inflation reports
• Jobs data
• Overall economic growth
• Global events and market sentiment

The Fed’s actions are just one piece of the puzzle. While they can sway investor behavior, they don’t directly set where mortgage rates land.  Last year in September 2024, the Fed announced a large, 50 basis point cut, but mortgage rates went up very significantly – not because of the Fed’s action, but because a couple jobs reports came out and they trumped any good we may have gotten from the good of the Fed’s big cut.

What This Means for You

If you’re thinking about buying a home or refinancing, don’t get too caught up in headlines about the Fed. Mortgage rates are influenced by a much broader set of factors. The good news is that, even with the small uptick after Wednesday’s cut, we’re still seeing rates that are significantly lower than just a few weeks ago.

As a mortgage loan officer, my job is to help you navigate these market shifts and find the best possible financing for your situation. If you’re wondering whether now is the right time to act, let’s connect. I’ll walk you through the numbers and options tailored to your goals. Call me at (214) 542-4095 or email Rob@TeamRobHomeLoans.com.