Lately, there’s been a funny thing where the Fed gets together, decides to cut rates, and then mortgage rates jump.
It has confused a lot of people who mistakenly think the Fed sets mortgage rates.
In reality, the Fed simply sets its own short-term rate called the federal funds rate, which has nothing to do with the popular 30-year fixed, a long rate.
So when all these cuts happened recently, and 30-year fixed rate quotes went up, folks were confused, upset even.
Despite all that, I actually think we might see lower mortgage rates tomorrow on Fed cut day. Finally.
Mortgage Rates Keep Going Up on Fed Day
First some quick background. After hiking rates 11 times in a row to get inflation under control beginning in early 2022, the Fed has cut rates five times.
They’ve slowly undone the restrictive conditions set in place to combat inflation, though rates remain a lot higher than they did back then.
Tomorrow they are expected to cut yet again, marking the sixth straight rate cut from the Fed since 2022.
Interestingly, on four of the past five cut days, mortgage rates went up on the day.
For example, when the Fed last cut on October 29th, the 30-year fixed went up. The same thing happened on September 17th and December 18th, 2024.
So it kind of turned into this running joke where the Fed gets together, provides so-called relief via a rate cut, and mortgage rates bounce higher.
But again, that reinforces the fact that the Fed doesn’t set mortgage rates.
The Fed works with old data that is already baked into mortgage rates. So the Fed will discuss the data we all know about and make a decision tomorrow to cut, hike, or hold.
The overwhelming favorite is a 25-basis point (0.25%) cut, currently at ~88% odds per CME FedWatch.
In other words, expect a cut. But should we also expect mortgage rates to bounce higher again?
Maybe not this time. Something tells me they could actually cooperate and go down as well.
Why Might Mortgage Rates Fall with the Fed This Time?
As for why, well, it’s kind of simple. The 30-year fixed has risen about 0.25% over the past month to around 6.375%.
It was as low as 6.125% in late October before the Fed (ironically) cut last time!
So this time we are heading into a cut with mortgage rates on the rise. It’s not a guarantee, but there’s a sense (at least from me) there could be a little relief after this cut.
The same goes for the 10-year bond yield, which is actually a bellwether for the 30-year fixed.
It has risen from just below 4% to nearly 4.20% over the past few weeks.
Sure, the Fed could say some stuff tomorrow that spooks the bond market, sending mortgage rates higher.
But given expectations are low and the cut was barely a cut until recently, prospective home buyers and those looking to refinance an existing mortgage might be pleasantly surprised tomorrow.
It’s just a hunch and if true, would be only the second time in the past six cuts that we see mortgage rates actually go down with the Fed.
Read on: How to track mortgage rates with the 10-year bond yield.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.