The Federal Reserve recently lowered its short-term benchmark interest rate by another quarter point—the third cut since September. While these moves are often viewed as good news for borrowers, they haven't lowered mortgage rates as expected. That's because mortgage rates don't directly follow the Fed's actions—they're driven by Treasury yields and broader economic factors.

The Fed's Role vs. Mortgage Rates

When the Fed reduces its benchmark interest rate, it directly impacts short-term borrowing products like credit cards and auto loans. However, long-term mortgage rates, including the 30-year fixed-rate loan, are driven by 10-year Treasury yields. These yields reflect investor confidence and inflation expectations, meaning mortgage rates align more with market sentiment than with Fed policy changes.

Mortgage Rates Remain Steady

Despite the Fed's rate cuts, Freddie Mac reports the 30-year fixed-rate mortgage remains steady at 6.72%. Treasury yields haven't dropped significantly, as investors weigh economic optimism against concerns about inflation and fiscal deficits. Additionally, lenders often bake risk premiums into rates to hedge against market volatility, further insulating mortgage costs from direct Fed influence.

Inflation and Market Dynamics

Inflation plays a pivotal role in mortgage rate trends. Persistent inflation pushes Treasury yields higher, leading to elevated mortgage rates as lenders demand greater returns to offset the declining value of money. Even with Fed rate cuts, high inflation can limit their impact on long-term borrowing costs.

A New Normal for Rates

Over the past 12 months, mortgage rates have stayed in the 6% to 7% range, suggesting that the market has reached a new equilibrium. Experts predict rates will average around 6.5% in 2025, depending on inflation, fiscal policy, and economic growth. While not as low as pandemic-era levels, these rates may reflect a more normalized lending environment.