How Interest Rates Really Work (and Why the Fed Doesn’t Control Your Mortgage)

When you hear on the news that the Federal Reserve has lowered rates by 0.25% (or 25 basis points), it can sound like mortgage rates are about to fall too. But here’s the truth: the Fed doesn’t directly set mortgage rates.

Let’s break it down in plain English.

The Fed Funds Rate: The “Short-Term” Rate

• The Fed Funds Rate is the interest rate banks charge each other for overnight loans.

• It influences things like credit cards, auto loans, and home equity lines of credit—basically, short-term borrowing.

• When the Fed raises or lowers this rate, it’s trying to cool down or boost the economy.

So, if the Fed drops the rate by 25 basis points, it makes short-term borrowing a little cheaper. But that’s not the same as your 30-year mortgage.

Treasury Bonds: The “Long-Term” Market

To understand mortgages, we need to look at Treasury bonds—the U.S. government’s way of borrowing money.

• 2-year bonds: Often bought by investors looking for short, safe returns.

• 5-year bonds: A step up in commitment.

• 10-year bonds: The one to watch for mortgages.

• 30-year bonds: For investors who want the longest-term safety.

These bonds are purchased by governments, pension funds, big banks, and everyday investors who want a safe place to park their money.

Why the 10-Year Bond Drives Mortgages

Mortgage rates closely follow the 10-year Treasury yield.

• Why? Most people either sell or refinance their home loans within 10 years.

• So lenders price mortgages based on the return investors demand for a 10-year bond, plus a little extra to cover risk.

If investors believe inflation will rise, they’ll want a higher return on bonds, which pushes yields—and mortgage rates—up.

If they feel confident inflation will fall, bond yields usually go down, which helps mortgage rates drop.

The Disconnect: Fed Cuts vs. Mortgage Rates

Here’s the key point:

• When the Fed cuts rates, it only guarantees lower short-term borrowing costs.

• Mortgage rates may or may not move, depending on how investors in the bond market interpret the Fed’s decision.

For example:

• If the Fed lowers rates because it sees the economy slowing, investors might rush into bonds, pushing yields down, and mortgage rates drop.

• But if investors think the Fed cut rates too late and inflation is still hot, yields might stay high—and mortgage rates don’t budge.

Why This Matters for You

If you’re buying or selling, don’t get too hung up on the headlines about “Fed rate cuts.” What really matters for your mortgage is the 10-year Treasury yield—and that moves based on investor confidence, inflation, and economic outlook.

In short:

• Fed rate = short-term loans

• 10-year Treasury = mortgage rates

So next time you hear “the Fed just cut rates,” remember: your credit card might get cheaper—but your mortgage depends on the bond market’s mood.

For example: in our local markets—from luxury estates in Vintage Oaks and Copper Ridge in New Braunfels mortgage rates shift based on bond yields, inflation, and investor confidence, not just Fed headlines.

🦋 What this means for you: If you’re thinking about buying or selling, don’t wait on the Fed’s announcements—let’s look at the bigger picture and how today’s rates affect your real goals.

🦋 Call me anytime if you’d like me to break down what the bond market is saying about mortgages today.

🦋 Your Journey – Your Legacy isn’t about timing one rate announcement. It’s about making smart, well-informed decisions. I keep an eye on both the Fed and the bond market so you don’t have to—and I’ll guide you through the noise.