How Fed policy affects mortgage rates
The Federal Reserve does not set mortgage rates directly — but its decisions move the 10-year Treasury, which does.
A common confusion: when the Fed announces a rate cut, you expect your 30-year mortgage rate to drop the next morning. It often doesn't. Sometimes mortgage rates even rise on a Fed cut day.
Here is why.
What the Fed actually sets
The Federal Reserve sets the Federal Funds rate target range — the rate banks charge each other for overnight reserves. That filters through to short-term consumer rates (credit cards, HELOCs, savings) almost immediately.
It does not set mortgage rates.
What sets mortgage rates
Long-term mortgage rates track the 10-year Treasury yield, plus a roughly 1.5–2.5 percentage point spread that compensates lenders for credit risk, prepayment risk, and servicing costs.
The 10-year Treasury yield is set by the bond market — millions of investors pricing in their expectations of future inflation and Fed policy.
Why Fed cuts don't always cut mortgages
By the time the Fed announces a cut, the bond market usually already priced it in weeks earlier. If the cut was 25 basis points and the market expected 50, the 10-year yield can rise on the news — and mortgage rates with it.
The bond market is forecasting; the Fed is confirming.
What actually moves the 10-year
- Inflation data: hot CPI prints push yields up.
- Job reports: a strong labor market suggests the Fed will hold higher rates longer.
- Geopolitical or recession risk: investors flee to Treasuries, pushing yields down.
- Treasury issuance: more government borrowing increases supply, pushing yields up.
What you can do
If you are mortgage-shopping, watch the 10-year Treasury yield, not the Fed Funds rate. Lock when the spread is in your favor, not because the Fed had a meeting.
The current 10-year is on the home page of this site. The current 30-year mortgage average is on the mortgage page.