Hoping for Lower Mortgage Rates? Here’s Why a Rate Cut Might Not Help

If you’re shopping for a home, you’re probably uniquely attuned to interest rates, because getting a lower rate on your mortgage can save you a lot of money over the life of your loan. With the Federal Open Market Committee (FOMC) poised to potentially lower rates in September, you might be hoping mortgage rates are about to drop, too. That could happen, but it also might not. The surprising truth is that mortgage rates are not as closely tied to the federal funds rate (the benchmark interest rate set by the Federal Open Market Committee, or FOMC) as you might think. Instead, they’re more correlated to 10-year Treasury yields.

Interest rates, and mortgage rates more specifically, can make a big difference in your financial life. That’s why I’ve published work on how mortgage rates affect middle-class American households and how investors form their expectations about interest rates. I tackle these questions and related ones in my capacity as the A. James Clark Chair in Global Real Estate at Georgetown University and as the Director of Research at Georgetown’s Steers Center. In this post, I’ll explain what you need to know about why a lower federal funds rate might not immediately translate to lower mortgage rates.

It’s not just about the federal funds rate

The FOMC meets eight times each year to determine whether it will make changes to the federal funds rate. As you may know, the federal funds rate is the rate at which banks lend money to each other for very short-term loans. It is expressed as a target range, and the effective federal funds rate (or EFFR) falls within that range. Changes to the federal funds rate tend to garner a fair amount of media attention, and they affect a variety of consumer interest rates. But an 0.25% reduction in the federal funds rate does not necessarily translate into a corresponding drop in mortgage rates.

Instead, mortgage rates are far more closely correlated to 10-year Treasury yields than the EFFR. This is because 10-year Treasuries are priced based on expectations about how the economy will do over the following 10 years, which is much closer to the time horizon on 30-year mortgages than to the short-term time horizon on which the EFFR is based. In fact, most mortgage originators use 10-year Treasury yields directly in their mortgage rate-setting formulas because they treat those yields as a measure of how investors think the economy will perform over the medium to long term. 

The chart below plots the EFFR against 10-year Treasury yields and 30-year fixed rate mortgage rates for the time period from July 1985 to July 2025 to illustrate these relationships. As you can see, while the three rates are correlated, 30-year fixed rate mortgages can fluctuate independently from the EFFR—and during periods where the EFFR is very low, 30-year fixed rate mortgage rates tend to remain higher. Meanwhile, 10-year Treasury yields and 30-year fixed rate mortgage rates tend to move together in a fairly predictable fashion. In short, a FOMC decision to raise or lower the federal funds rate probably won’t translate directly into a corresponding increase or decrease in 30-year fixed rate mortgage rates. 

What moves 10-year Treasury yields (and mortgage rates as a result)?

If 10-year Treasury yields and 30-year mortgage rates are so closely correlated, then it follows that predicting changes in the 10-year Treasury yield should be able to help you predict what’s coming for mortgage rates. Unfortunately, doing this is not straightforward—there is still debate among academic institutions and economists over the factors that drive long-term Treasury yields. While the EFFR is influenced by short-term economic changes, long-term Treasury yields are broadly determined by the law of supply and demand, just like any other good or service in the economy. 

Demand for Treasuries goes up when investors want to invest in safer assets, which pushes prices up and yields down. Demand for Treasuries goes down when investors are less interested in safer assets, which pushes prices down and yields up. When the Treasury issues more Treasuries (increasing supply), they’re seen as slightly riskier, so yields go up (and prices go down) because investors will only buy new Treasuries if they think they’re being fairly compensated for that risk.

So what needs to happen for 10-year Treasury yields and mortgage rates to go down? Here are three scenarios that could make this more likely:

• Investors expect market volatility: If investors think the economy will be very volatile going forward, then demand for Treasuries will go up and yields will go down. This would push mortgage rates down.
• Investors expect inflation will go down: If investors think that inflation will go down moving forward, they’ll be more willing to buy Treasuries with lower yields (because they don’t need such high yields to counteract the effects of inflation). This would push 10-year Treasury yields and mortgage rates down. Conversely, if investors think inflation will go up (potentially because of government actions like tariffs or significant subsidies/economic stimulus) then yields won’t decline and mortgage rates likely won’t decline either. 
• Investors expect weaker growth: If investors believe the economy will grow more slowly in the future, they’ll be more willing to purchase safe assets like Treasuries. This increase in demand will increase prices and lower yields, once again lowering mortgage rates.

You might wonder: Why aren’t 30-year fixed rate mortgages more closely correlated to 30-year Treasuries? This is because, even though the vast majority of US residential mortgages issued every year are 30-year fixed rate mortgages, lenders assume that very few borrowers will keep their mortgage unchanged for such a long period of time. Indeed, most borrowers move out of their places before 30 years pass (the median in 2024 was 11.8 years), thus closing their existing mortgages and opening new ones. Similarly, many people refinance if a more attractive mortgage rate becomes available. For these reasons, it makes sense that mortgages are priced based on rates that capture economic expectations over the next 10 years.

Why aren’t mortgage rates more correlated to the EFFR?

Why doesn’t a change in the EFFR have more impact on mortgage rates? Put simply, it’s because the EFFR and mortgage rates have less in common than you might expect. Two differences are especially important:

1. First, the EFFR is charged on very short-term loans, whereas mortgage rates are set assuming that the loan is fully repaid over the medium to long term. As a result, the EFFR moves due to temporary swings in the economy (e.g., down in bad times, up when the economy overheats). These conditions, though, are typically temporary. No recession or boom lasts for 30 years without interruption. Because economic conditions are, on average, good and fairly stable over the medium and long term, mortgage rates tend to be higher and exhibit fewer large swings as shown in the chart above.
2. Second, the EFFR is charged on very low-risk loans between banks, whereas mortgages are a bit riskier—that helps explain why many mortgage originators bundle groups of mortgages together and sell them to investors in the form of mortgage-backed securities (MBS). But as a result, mortgage rates also depend on investor demand for MBS. When demand for MBS is low, mortgage originators have a harder time selling MBS and need to be responsible for the mortgages themselves—thus charging higher mortgage rates to cover the additional risk, regardless of movement in the EFFR.

This doesn’t mean that the EFFR is inconsequential. Other interest rates are more closely tied to the EFFR—for example, the APY on Wealthfront’s Cash Account (offered through our program banks) and the interest rate on Wealthfront’s Portfolio Line of Credit. 

Key takeaways

If you’re hoping the FOMC will lower rates because you think it will directly impact mortgage rates, here’s what we think you should keep in mind:

• If the FOMC changes the target range for the federal funds rate, mortgage rates will generally not immediately increase/decrease by the same amount. 
• Thirty-year fixed rate mortgage rates are more closely correlated with 10-year Treasury yields than the EFFR. 
• Predicting 10-year Treasury yields (and mortgage rates) is tough to do. Three scenarios that could push mortgage rates down are:
  • Investors expect a lot of market volatility
  • Investors expect inflation will go down in the future
  • Investors expect weaker economic growth

Ultimately, it’s difficult to predict exactly how mortgage rates will change in the future, especially over the short term. Focus on what you can control: Taking out a mortgage with monthly payments you can comfortably afford. If mortgage rates decrease in the future, you might be able to refinance at a more attractive rate.