Fed Rate Cuts Don’t Always Mean Lower Mortgage Rates

• Mortgage rates rose over 70 basis points in late 2024 following the Fed’s initial cuts before volatile dips
• The 10-year Treasury yield influences mortgage rates more than the federal funds rate
• Historical data shows Fed cuts lead to higher long-term yields 51% of the time
• Current cycle breaks a 40+ year trend of falling yields after rate cuts

When the Federal Reserve cut interest rates by 50 basis points in September 2024, many potential homebuyers expected relief. Instead, 30-year mortgage rates jumped from 6.09% to 6.84% by November 2024, defying conventional wisdom about monetary policy transmission. While rates have since dipped to around 6.3% amid ongoing cuts, they remain stubbornly high, showing the disconnect is very real.

This counterintuitive relationship between Fed policy and mortgage costs is not an anomaly. It is a recurring pattern that highlights the complex mechanics of how interest rates actually work in practice.

The Treasury Connection: Why Mortgage Rates March to a Different Beat

The fundamental disconnect comes down to a simple fact: mortgage rates do not follow the federal funds rate. Instead, they track the 10-year treasury yield, which reflects long-term economic expectations rather than short-term policy changes.

"Since 1970, the 10-year Treasury yield has increased in the month following a Fed rate cut about 51% of the time," according to economic analyses.

This statistic alone should give pause to anyone assuming rate cuts automatically translate to cheaper home loans.

The current cycle proves the point. While the Fed has cut rates by 125 basis points since September 2024, the 10-year Treasury yield has often moved in the opposite direction. It climbed over 100 basis points from lows around 3.6% in September 2024 to peaks above 4.4% in early 2025, before stabilising around 4.13% recently.

Historical Precedents: When Cuts Don’t Cut It

The Post-Financial Crisis Paradox (2009–2011)

Even during the most aggressive easing cycle in modern history, mortgage rates remained stubbornly high. Despite the Fed holding rates near zero and launching multiple rounds of quantitative easing, 30-year mortgage rates averaged around 5% in early 2009. They only fell to 4.2% by late 2010 before rising back to 4.8% in early 2011.

The culprit was bond investors demanding higher yields due to inflation concerns from quantitative easing and uncertainty about recovery. The 10-year Treasury yield fluctuated between 2.5% and 4% during this period and did not sustainably drop below 2% until mid-2011.

The "Insurance" Cuts of 2019

The Fed’s three preventive cuts in 2019, totalling 75 basis points, initially pushed mortgage rates down from 4.5% to about 3.7%. But rates rebounded to 3.8% in November after the October cut, as improving economic data reduced fears of recession.

This episode shows how cuts in a non-recessionary environment can paradoxically signal economic strength, pushing long-term rates higher as markets price out recession risk.

The Current Anomaly (2024–2025)

The present cycle is a stark outlier. In the seven Fed cutting cycles since the 1980s (excluding the current one), the 10-year yield was lower 100 days after the first cut every single time. The 2024–2025 cycle shattered that streak with yields rising more than 100 basis points in the early months.

The Fed began with a 50 bp cut in September 2024, followed by 25 bp cuts in November and December 2024, and again on September 17, 2025. That makes a total of 125 bp, bringing the federal funds rate to 4.00–4.25%. Yet mortgage rates have not seen consistent relief. After the most recent cut, they only edged down slightly to about 6.3%, still too high to meaningfully stimulate housing activity.

Several factors converged to create this unprecedented outcome:

• Economic resilience with GDP growth estimates for 2024 rising from 1.2% to 2.7%
• Persistent inflation with CPI accelerating for four consecutive months
• Political uncertainty over election outcomes and fiscal policy
• Deficit worries tied to rising government spending and debt sustainability

The Market’s Forward-Looking Nature

This disconnect also reflects the forward-looking nature of markets compared to the Fed’s reactive approach. By the time the Fed cuts rates, markets have often priced in the move, limiting its impact on long-term yields.

When cuts occur during economic strength, as with the current "soft landing" narrative, they can even signal that the economy does not need much support. That prompts higher long-term rates as investors price out recession risk.

Implications for Investors and Homebuyers

For Homebuyers: Do not time purchases solely on Fed policy. Monitor the 10-year Treasury yield and broader economic indicators instead. With mortgage rates still around 6.3%, affordability remains tough despite cuts.
For Investors: Rate cuts do not automatically benefit interest-rate sensitive sectors. Context matters more than direction.
For Portfolio Strategy: Duration risk in bond portfolios can rise during cutting cycles if yields move up, creating losses even as the Fed eases.

The Bottom Line

The relationship between Fed policy and mortgage rates is far more nuanced than headlines suggest. The Fed controls short-term rates, but long-term rates, and therefore mortgage costs, are set by markets that reflect growth expectations, inflation, and fiscal outlook.

As the current cycle shows, sometimes the most important factor is not what the Fed does, but why it is doing it, and whether markets believe the economic backdrop justifies those actions. Even with the latest 25 bp cut in September 2025, relief for mortgage borrowers remains elusive.

For now, homebuyers hoping for lower costs from Fed policy may need to look elsewhere. The bond market, it seems, is not buying what the Fed is selling.