(NewsNation) — Those hoping for lower mortgage rates after the Fed’s cut may be disappointed: This week’s move isn’t expected to bring much relief.
Part of the reason is that Wednesday’s quarter-point cut was widely anticipated, so it was already priced into the market. That expectation helped drive the average 30-year mortgage rate down from 6.58% in mid-August to 6.26% this week, the lowest level in nearly a year, according to Freddie Mac.
The decline has given potential homebuyers some breathing room and set off a wave of refinancing activity, but a major shift in affordability isn’t likely anytime soon.
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“Mortgage rates will remain steady as bond market participants await further economic data, particularly the next jobs report on October 3,” Chen Zhao, head of economics research at Redfin, wrote Wednesday.
Fed Chair Jerome Powell called this week’s decision a “risk management cut,” as the central bank grapples with stubborn inflation and a cooling labor market — two forces tugging policy in opposite directions.
“There’s no risk-free path,” Powell said. “It’s quite a difficult situation for policymakers.”
The Fed doesn’t set mortgage rates
The Fed helps set the tone for borrowing costs, but it doesn’t directly control mortgage rates.
When people talk about the Fed cutting rates, they mean the federal funds rate — what banks charge each other to borrow overnight. That rate heavily influences short-term borrowing costs, but it isn’t the best guide for longer-term loans like mortgages.
Instead, mortgage rates are more closely tied to the bond market, especially the yield on the 10-year Treasury note. When that yield drops, mortgage rates tend to follow.
The Fed’s decisions still matter because the 10-year Treasury yield reflects investors’ expectations about the future. But that’s why Powell’s outlook often carries more weight than the cut itself.
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On Wednesday, policymakers signaled two more cuts could come this year, but only one in 2026 — fewer than expected.
“This ongoing gap between market and Fed expectations means that some risk of upward pressure on mortgage rates remains,” Realtor.com Chief Economist Danielle Hale said in a statement.
Many homeowners aren’t taking any chances: Refinances made up nearly 60% of mortgage applications this week, the highest share since January 2022, according to Freddie Mac.
Where will mortgage rates go from here?
If last fall is any guide, mortgage rates could head even higher. A year ago, they dropped to 6.09% ahead of the Fed’s September cut, only to rebound to 6.79% by early November.
It may not play out the same way this time, but it’s a stark reminder that mortgage rates don’t move in lockstep with the federal funds rate.
Redfin’s Zhao expects mortgage rates to remain “mostly steady” for now, given the Fed’s “muddy picture” for future rate cuts.
However, that could change with new economic data, especially if it shows the labor market is weakening faster than expected. Bad news for the economy could send the 10-year Treasury yield lower, bringing mortgage rates down too.
But even if mortgage rates decline, the 3% levels of 2021 aren’t likely to return. Fannie Mae’s August forecast sees the 30-year fixed averaging 6.2% in 2026.
