When the Fed cuts rates, mortgage rates will drop too, right? 🤑

It’s the hope that everyone is clinging to. You see the headlines, and it seems logical that when the Federal Reserve finally announces a rate cut, your potential mortgage payment will immediately get cheaper. But is that how it really works?

💡 Key Point: The Fed’s rate is for short-term loans (like credit cards), while a 30-year mortgage is a long-term loan. Because of this, mortgage rates move much more closely with the 10-Year U.S. Treasury bond (since most people own their home about 10 years).

The Interest Rate Dance

The rate the Federal Reserve controls is the Federal Funds Rate. It's the overnight interest rate for big banks that need to borrow money for just one night. It’s a powerful tool, but its direct influence is on short-term debt.

On the other hand, a 30-year mortgage is a long-term loan.

Banks funding these loans don't just rely on the Fed's rate when setting mortgage rates. They use the 10-Year U.S. Treasury bond and a guide to where the market is when determining where to start on your mortgage rate.

They take the rate on the 10YR and raise it depending on your credit score, loan type, and their profit margin. All of this to adjust for the risk that you might not pay that loan back and they need to make money above what they could get risk-free lending it to the government.

You don't have to take my word for it. The data makes it clear:

Let's break down what this visual proves:

• The Dance Partners: Notice how the thick green line (your average mortgage rate) and the thinner blue line (the 10-Year Treasury) move together. They're like dance partners, following each other's lead up and down over the decades.
• The Drummer: Now, look at the dashed red line (the Fed’s rate). It’s part of the same song, but it's playing a different instrument. Its movements are often more dramatic and don't sync up perfectly.
  
  

💡 Key Point: While the Fed influences the music (general trend), the 10-Year Treasury is the partner that mortgage rates really dance with (main factor that controls mortgage rates).

This brings us to a major question...

So if the Fed is going to cut rates and 10-Year Treasury is what matters, why wouldn't rates go down? 📉

This is the most critical question in finance today. If the 10-Year Treasury is the benchmark, what force could keep it higher than everyone expects?

The answer is what pushed rates up from 3% to 7% the first time: inflation.

This isn't a surprise to you. We feel this every time we go to the grocery store, a restaurant, or to Town Center...
 

💡 Key Point: The initial, rapid decline in inflation has stalled. Key indicators now suggest inflation is sticky and may even be moving higher again. This is the single biggest reason the market expects interest rates to remain elevated for longer.

The Data Shows a "Plateau and Rebound"

For a while, the story was simple: inflation was falling, and a return to normal felt just around the corner. The latest data, however, reveals a more frustrating reality. The easy part of the inflation fight appears to be over.

To see this, we can look at the direction several key inflation indicators are pointing:

The story this chart tells is undeniable:

• The Synchronized Fall: Through late 2022 and 2023, all lines moved down in unison. This was the "easy" phase, driven by a return to normal business after the lockdowns.
• The Plateau and Rebound: Look at the right side of the chart. The downward momentum vanishes. The lines flatten out, and all have started to rebound back upwards. This isn't one rogue data point; it's a chorus of indicators all singing the same tune.

Why Has Inflation Stalled? 😡

This isn't happening in a vacuum. Several powerful economic forces are creating a floor under prices, making them resistant to falling further. These include:

1. Persistent Government Spending: Fiscal policy, including large-scale infrastructure and energy projects, injects a significant amount of money into the economy. This spending supports demand for both labor and materials, which can keep price pressures from falling further.
2. Shifting Trade Policies: The implementation of tariffs and a broader move toward "onshoring" (producing goods domestically) can raise the costs of imported components and finished products. These higher costs are often passed on to consumers.
3. The Fed's Own Balancing Act: The Federal Reserve is in a tough spot. If they signal rate cuts too early, it could spark a new wave of borrowing and spending, reigniting the very inflation they have fought to control. This risk forces them to remain extremely cautious.
4. General Price Trends: Over the long run, prices naturally tend to rise because we print money. It takes significant economic slowing to counteract this natural upward drift.

The Rate Cut Paradox: Why Waiting for the News Can Cost You 😳

So if inflation is the key, many people think, "I'll just wait for the Fed to officially announce their rate cuts. Then I'll buy because mortgage rates will be lower."

It sounds logical, but the market is a forward-looking machine. It doesn't wait for the news; it trades on the expectation of news. By the time a rate cut is officially announced, the "good news" has often already been priced into the market, and investors have moved on to worrying about the next thing.

💡 Key Point: The best mortgage rates often appear in the months leading up to a Fed rate cut, when market optimism is highest. Acting when the Fed actually cuts can mean you've already missed the bottom.

A Real-World Example: When the Fed Cut Last Time

We don't have to look at ancient history for proof. Let's look at what happened earlier this year.

The chart below shows a zoomed-in view since the start of 2024, tracking the 30-year mortgage rate against the Fed Funds Rate: 

Let's break down what happened:

• The Expectation Phase (May - Sep 2024): After peaking at over 7%, mortgage rates fell dramatically in the summer. Why? The market began to strongly anticipate that the Fed was finished hiking and that as many as 6 cuts were on the horizon. This optimism pushed rates down nearly a full percent, to a low of 6.2% in September.
  
  ➡️ It was a fantastic time to buy if you took advantage of it. But most didn't because they thought rates would fall further...
  
  
• The Reality (Oct 2024 Onward): The Fed delivered its first cut in September and continued cutting for several months. But look what happened: mortgage rates reversed course and started to rise, climbing back to 7% by the end of the year. The market's focus had already shifted to worries that the Fed wouldn't cut as much as previously expected.

The lesson is clear: The market moves on hope, but then demands certainty. The best opportunities appear when hope is extremely high.

And right now, everyone expects 6 rate cuts by the end of 2026. It's what's driven mortgage rates down over the past month. It's also a signal that expectations are at another high point! 🚨

From Confused to a Clear Decision 👍

So where do we go from here?

Let's recap a few key points:

1. We've just confirmed what you've likely been feeling: inflation is not going away, and that's keeping interest rates higher than anyone would like.
2. The Fed is going to cut rates this month and expectations for rates to drop are near extreme highs.
3. We could see rates continue to fall, but the drop might be smaller or shorter-lived than most people think because inflation could keep rising and ruin the party.

It's easy to look at this and decide the "safe" move is to wait for a better rate. But this perspective misses a crucial part of the equation. It focuses entirely on the cost of borrowing money and ignores the potential cost of waiting to buy.

Let's reframe the risk. The real gamble isn't buying in a 6% rate environment; it's waiting and potentially being priced out of your life's next chapter forever.

Owning Real Assets is Your Best Protection from Inflation

During periods of persistent inflation, the cash you hold in a savings account slowly loses its buying power.

A real asset—like real estate, gold, jewlery, art, collectibles, etc.—does the opposite. It is a powerful hedge against the very inflation we've been discussing. While the value of a dollar may decrease, the value of your home and the stability it provides tends to increase.

Every month you wait, you risk facing a double-edged sword:

• Home prices are likley going higher over time, forcing you to pay even more for the same house.
• Rates could unexpectedly go higher, not lower, increasing your monthly payment and/or holding you back you from accomplishing your goals.

Waiting for the "perfect" moment is an attempt to time two escalators moving at once. 

A smarter strategy is to focus on what you can control and take the first step.

Your Path Forward Is About Your Life, Not the Market

You cannot control inflation or the 10-Year Treasury. But you are in complete control of the decision to move your life forward.

A home is the foundation for your future. It's the backyard for the dog, the extra bedroom you desperately need, the school district for the ones that matter most (your kids).

And let's be clear - I'm not advising you to force a purchase beyond your budget or overextend yourself financially.

Instead, I'm encouraging you to avoid being paralyzed by fear. I'm guiding you to take clear, powerful steps to put yourself in the driver's seat.

Your Next Steps:

1. Define Your "Why." Get crystal clear on what this move means for you and your family. Is it about more space? A better community? A shorter commute? Write it down. This is the emotional fuel for your journey.
2. Know Your Numbers. Before you can act, you need clarity. Understand your budget, your credit, and what you can comfortably afford. This isn't about guessing; it's about building a confident financial plan.
3. Explore Your Options. The market is complex, but you don't have to navigate it alone. This is the moment to lean on your Realtor's expertise to understand what's possible right now, in your specific area and price range.

When you're ready, the next conversation isn't about timing the market. It's about building your future.

👉 And don't forget: the local conditions of your market can create opportunities to accomplish your goals regardless of the national headlines.

About the Author: Dr. Alex Stewart

Alex is the Founder of The Market Distillery, an independent research company that distills the real estate market into easy-to-understand insights and practical advice.

His goal is to help Realtors and their clients make informed decisions and accomplish their real estate goals.

Before this, he...

• Was a financial analyst for Georgia-Pacific and The Home Depot in Atlanta, GA.
• Helped over 900 families in 8 years as a mortgage banker in Jacksonville, FL.
• Taught business management at the University of North Florida for 4 semesters.