The Federal Reserve’s Open Market Committee (FOMC) did the expected, cutting the federal funds rate by 0.25%. That means the rate paid by banks will fluctuate between 4.5% and 4.75%.
While that will lower some borrowing costs paid by consumers, it will likely have little impact on the rate millions of Americans care about the most – the rate paid on mortgages.
In some cases, a falling federal funds rate can influence the direction of mortgage rates but generally, mortgage rates move in tandem with the interest rate the Treasury Department pays on its 10-year bond. Right now, that rate is moving higher, pulling mortgage rates with it.
Bond rates began moving higher in 2022 because of inflation and a growing federal deficit. To finance the deficit the Treasury Department must sell more bonds and pay a higher interest rate to attract investors.
Why mortgages were so cheap during the pandemic
At one point during the COVID-19 pandemic the yield on the 10-year bond was less than 1%, resulting in mortgage rates of around 3%. The Treasury’s 10-year bond is now paying over 4%.
It went up even more this week as an indirect result of Donald Trump’s election victory. Bond traders anticipate continued inflation and deficit spending as a result of Trump’s announced fiscal plans. So mortgage rates will likely remain in the 6% to 7% range, at least in the short term.
The Fed’s rate cut will help consumers in other areas. It should bring down the interest rate on auto loans and personal loans. It should also chip away at the current record-high interest rates consumers pay on credit card balances.
“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the FOMC said in a statement after announcing the rate cut. “Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated.”