The Fed cut rates for third time this year. Here’s what it means for mortgages

‘The Fed looks in the rearview mirror, and we are looking at the front windshield,’ a mortgage expert told The Independent

The Federal Reserve announced today it’s lowering interest rates by 0.25 percentage points, a move that was expected by economic experts and marks the third rate cut this year.

On a practical level, the Fed decision indirectly impacts mortgages. But the impact isn’t quite what you think, said Kevin Watson, a branch manager at Churchill Mortgage.

It’s more about how the anticipation of today’s decision affected rates - not how today’s decision will impact rates in the coming weeks.

“The Fed’s cuts don’t make an impact on the day that they cut rates,” Watson told The Independent by email. “The way the mortgage rates work is in anticipation of what they think the Fed will do the next time they meet. I like to think of it like this: The Fed looks in the rearview mirror, and we are looking at the front windshield.”

A look back at how mortgage rates have changed this year offers insight into their relationship to rates set by the Federal Reserve, which also help keep inflation and the job market in balance.

Today’s announcement of a rate cut by Fed Chair Jerome Powell, pictured, is not a guarantee that mortgage rates will decline in the coming weeks (AP)

A rocky relationship

Generally, the rule of thumb is that mortgage rates tend to follow the Fed rate. If the Fed rate goes down, mortgage rates go down, and vice versa.

However, that isn’t always the case. For example, this year, mortgage rates went up after a series of cuts at the end of 2024, according to Freddie Mac’s Primary Mortgage Market Survey, which tracks average mortgage rates over time.

That’s because mortgages aren’t directly tied to the Fed rate - multiple factors impact it, including Treasury bonds. If those bonds rise in price, mortgage rates tend to rise (but not always), and vice versa, according to lender Rocket Mortgage.

Ahead of the curve

The Federal Open Market Committee, the Federal Reserve’s policymaking group, meets multiple times throughout the year to discuss the state of the economy and decide if it needs to raise or lower rates to keep inflation in check and employment healthy.

The committee chose to cut the Fed rate at its September 16-17 and October 28-29 meetings. But months before that, rates for 30-year fixed mortgages (the most popular type) started to drop.

Mortgages aren’t directly tied to the Fed rate - multiple factors impact it, including Treasury bonds. If those bonds rise in price, mortgage rates tend to rise (but not always) and vice versa (Getty Images)

From May 29 to September 11, rates for 30-year fixed-rate mortgages fell from 6.89 percent to 6.35 percent, and continued their steady decline (with temporary rate spikes) to 6.19 percent on December 4, according to the Primary Mortgage Market Survey.

“It’s important for people to realize that by the time the Fed actually makes their announcement as to [a] rate cut, it’s already factored into the bond pricing,” said Shmuel Shayowitz, president of mortgage banker and direct lender Approved Funding.

What’s coming next?

Shayowitz believes that, as we close out the year, mortgage rates will continue to fall because December is usually kind to mortgage rates.

“I do believe, however, that rates will improve going into the new year as December is historically a favorable month where rates [tend] to trend lower as traders close out their positions for the year,” he told The Independent by email. “Furthermore, I do see continued job market weakness, which will force the Fed to act despite their hawkish stance.”

Watson also believes rates will fall, but only if inflation and the job market move in certain directions, he said.

“Although they are not directly tied to each other, if we see inflation going down and jobs are weak, we will most likely see lower mortgage rates in anticipation of the next Fed rate cut,” he said.

If home loan rates continue to fall, Watson predicted that home values will likely rise because mortgage demand will increase.

“Higher demand on housing will drive up prices since we are still at a low in inventory of homes available,” he said.