Will the Fed Rate Cut Spur a Mortgage Rate Decline Swiftly?

New York, NY, September 18, 2025-"With the Federal Reserve in cutting mode, many people expect mortgage rates to fall fast. Unfortunately, it isn’t that simple,” reports the Wall Street Journal.

“The Fed sets a target for a short-term, overnight interest rate. Lots of other borrowing rates are priced off that baseline. But mortgages aren’t one of them.

“Instead, a key benchmark for mortgages is the yield on ten-year U.S. Treasurys, since that is about the expected amount of time a homeowner might hold a 30-year mortgage before moving or refinancing. The yield on those notes helps determine the price investors pay for bonds that pool many individual mortgages.

“True, the Fed can influence the yield on that longer-dated paper through its current short-term rate policy, economic projections and jawboning. Longer-term Treasury yields and mortgage rates had been falling in anticipation of the Fed’s move Wednesday to cut rates by a quarter of a percentage point.

“Even so, how things play out longer term is ultimately in the hands of investors. 

“And they might not want to lower their demands for yield over a number of years because there is another crucial thing they have to consider: inflation.

“Regardless of what investors think the Fed might do with rates in the near future, investors are also worried that being paid a fixed rate on today’s investment isn’t going to be enough to keep up with inflation. The risk is that the same interest payment years from now might buy a lot less.

“This can lead to confounding moves. A year ago, for example, the Fed surprised markets by lowering its benchmark rate by half a percentage point at its September meeting. Over the next two months, the ten-year Treasury yield rose by about a half percentage point and average mortgage rates jumped about three-quarters of a point.

“That isn’t to say markets in coming months will respond to the Fed’s latest move in the same way. Perhaps the current feeling is that inflation is mostly under control and the bigger risk is job losses due to a slowing economy. In that case, lower rates might not put as much upward pressure on prices, causing inflation fears to recede.

“That, in turn, could lead to lower mortgage rates, revived home-buying activity and more housing supply that helps keep home prices in check.

“But investors who buy mortgages, corporate debt or U.S. Treasurys that last for years and years are thinking way beyond what will happen at the Fed’s next meeting.

“The result is that, historically speaking, changes in the Fed’s benchmark rate targets ‘barely are correlated’ with changes in home-borrowing costs, according to strategists at Morgan Stanley, who compared prior changes in Fed-rate policy to changes in mortgage rates.

“‘We would argue that if the Fed simply does what the market expects, mortgage rates will not fall materially,’ the strategists wrote in a recent note.

“That’s not to say the Fed is powerless. Home buyers and investors can’t ignore the politics currently swirling around the central bank. In theory, this means a future Fed might give priority to aims such as promoting the housing market via lower home-borrowing rates.”