Interest-ing Times: That Time the Fed Rate Decreased and Mortgage Rates Increased
Over the past few months, you might have heard more than one commercial trying to entice potential borrowers to take out a home loan because the Federal Reserve is cutting rates. The idea is that a lower Fed Funds rate will translate into lower mortgage rates across the board. But much to the disappointment of potential home buyers this has not been the case.
The graph below from the Federal Reserve Economic Data (FRED) paints the picture of interest rate and mortgage rate trends over the last year.
In the latter half of 2024 the Fed cut the Fed Funds rate (green dashed line) by a cumulative 1%. Many people expected that mortgage rates would follow suit. Instead, average 30-year fixed mortgage rates (blue line) rose 12% from their low as the Fed was cutting rates. This is the opposite of what many expected to happen when the Fed started cutting rates.
You can also see that mortgage rates trend similarly to the rate on the 10-year Treasury bond (red dashed line) which rose 22% over the same period. In fact, mortgage rates are influenced by the yield on the 10 Year Treasury bond. So, can the Secretary of the Treasury lower mortgage rates just by cutting the yield on the 10-year Treasury just like the Federal Reserve Board cuts the Fed Funds rate? Unfortunately, not. Treasury rates emerge from marketplace actions, like buying and selling of bonds.
Scott Bessent, current Secretary of the Treasury, has stated that lowering the rate on the 10-year Treasury is a focal point for the current Treasury department. However, it is unclear if the department has any tools at its disposal to directly impact the rate. Sadly, for borrowers, there is no direct line of sight to either the Federal Reserve or Treasury Secretary directly reducing mortgage rates, despite what you might be hearing on the radio.
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