Why Mortgage Rates Don’t Always Follow The Fed!

Mortgage rates have been on the move again—climbing back to their highest levels in two weeks. Many homeowners and buyers are puzzled: how can mortgage rates rise right after the Fed announces a rate cut? The short answer—it’s not as straightforward as it seems.

Clearing Up the Confusion

There’s a widespread belief that the Federal Reserve directly controls mortgage rates. In reality, that’s not true. The Fed does set the Federal Funds Rate (FFR), but mortgage rates operate under a different set of rules. Here’s what you need to know:

• The Fed Funds Rate ≠ Mortgage Rates

  • The FFR is the interest rate banks charge each other for overnight loans.

  • It changes only during Fed meetings (8 times a year).

  • Mortgage rates, however, shift daily—sometimes multiple times in a single day.

• Why Mortgage Rates Move Faster

  • Mortgage rates are tied to the bond market, which reacts instantly to economic news, inflation data, and Fed commentary.

  • If markets anticipate a Fed cut or hike, rates often adjust well before the Fed makes its official move.

• The Role of Fed Announcements

  • While the Fed doesn’t set mortgage rates, its policies and statements still influence them.

  • For example, Quantitative Easing (QE)—the Fed’s large-scale buying of Treasuries and mortgage-backed securities—can directly impact long-term rates.

  • Surprises in Fed policy can spark sharp swings in mortgage rates.

• Timing Is Everything

  • By the time the Fed actually cuts or raises rates, the bond market has usually priced it in.

  • That’s why it’s common to see mortgage rates move in the opposite direction of the Fed’s action on announcement day.

The Takeaway

Mortgage rates and the Fed Funds Rate may move for the same reasons—like inflation or employment data—but mortgage rates tend to react faster. Think of it this way: the Fed sets the tone, but the bond market writes the music.

If you’re considering buying or selling in Sonoma County, let’s talk. Our team is here to help you navigate these evolving market dynamics with clarity, strategy, and care.