Fed Cuts Do Not Mean Mortgage Rates Will Also Drop

The Fed cut rates several times this year but it doesn't seem like mortgage rates experienced the same drop. This is a source of confusion for many of us but the answer is simple. The Fed cut the funds rate and the discount rate which are the rates charged when banks borrow short term money from other "banks". These are not mortgage rates. Mortgage rates are based on mortgage backed securities - essentially the investment market performance of bonds issued by Freddie Mac and Fannie Mae. If we are buying bonds as an investment for the long term we do not want inflation to degrade the fixed rate of return they provide. So, in an inflationary period, bonds will be less desireable and therefore carry a higher rate which will translate into higher mortgage rates.

Of course, sometimes mortgage rates are based on other indexes but generally speaking the vast majority of mortgage rates are based on Freddie and Fannie bonds.