Federal Reserve's Cuts May Not Lower Mortgage Rates, Analysts Warn

Softer economic data make Federal Reserve interest rate cuts more likely, but that doesn’t mean mortgage rates will follow them down.

Homebuyers and those looking to refinance may have to wait longer for interest rates on 30-year mortgages to fall meaningfully below 6.5%, according to economists and market analysts. 

The bond market is propping up mortgage rates, as traders are betting the Fed may only lower rates a few times rather than undertake an aggressive cycle of rate cuts. If there were signs that tariff impacts would significantly damage the economy, the Fed would have more wiggle room to cut interest rates aggressively, and bond traders would likely help bring long-term rates down.

Right now, analysts say, the economy doesn’t seem to be weakening enough to warrant that type of action—if it even gets to that point at all in the coming months.

“For the foreseeable future, it really does feel like mortgage rates are going to be staying pretty close to where we are,” said Chen Zhao, head of economics research at Redfin.

Mortgage rates could even rise if tariffs end up pushing up inflation substantially, Zhao said.

If so, markets’ expectations of Fed cuts would diminish, keeping rates elevated. One potential harbinger of that scenario came on Thursday, when new data on inflation for producers rose far more than expected, raising the prospect that businesses will pass on price increases to consumers.

Fed Actions Only Have Indirect Impact

Fed cuts would immediately make borrowing cheaper on credit cards and auto loans, since those products are based on the short-term interest rates the central bank heavily influences. Mortgages are a different story, however.

Rates on a 30-year mortgage are based heavily on investors’ expectations of the economy and inflation over the next decade, not on the Fed’s near-term actions.

While mortgage rates include other costs to process each loan, they rely heavily on the benchmark 10-year U.S. Treasury yield—the interest rate that the U.S. government pays to issue debt over 10 years. A complex mix of factors helps determine 10-year yields, including economic growth forecasts, inflation, demographics, and U.S. fiscal deficits.

“By no means am I saying that a Fed rate move does not affect mortgage rates at all,” said David Gottlieb, a wealth manager at Savvy Advisors who focuses on real estate, but the central bank only has “an indirect pressure” on long-term rates.

It’s a point that Fed Chair Jerome Powell—who’s faced attacks from President Donald Trump for keeping interest rates high and dampening the mortgage market—made at his news conference last month.

“We don’t set mortgage rates at the Fed,” Powell said. “It’s not that we don’t have any effect. We do have an effect, but we’re not the main effect.”

Bond Market is Hard to Please

Some Fed officials still seem hesitant about cutting rates in September, but markets are more or less viewing a rate cut next month as a slam dunk, analysts say. Some observers have suggested that the Fed could cut rates by 50 basis points rather than its usual quarter-point decrease. 

But a supersized rate cut could “send a panic message,” Andrew Brenner, head of international fixed income at NatAlliance Securities, wrote in a note to clients.

Last year, for example, the Fed opted for a 50 basis point cut after deciding inflation had ticked down enough from its post-COVID highs. Rather than also heading downward, the 10-year Treasury yield—and thus mortgage rate —rose sharply, he wrote. 

Bond investors “pushed back hard against the Fed’s easing because they correctly perceived that the economy and labor market were in better shape than feared by Fed officials,” Ed Yardeni, an economist and president of Yardeni Research, wrote in a note to clients. 

Bond vigilantes “may be lurking” again, he wrote, referring to the term he coined to describe bond investors who protest potentially unwise policy actions by driving up interest rates. 

The Trump administration wants aggressive Fed action, with Treasury Secretary Scott Bessent on Wednesday calling for a 50 basis point rate cut in September and more after that.

But long-term yields don’t always move in the direction presidential administrations want them, Yardeni cautioned.

“The Trump administration is pushing for the Fed to cut the federal funds rate to reduce the long-term borrowing cost of the federal debt and to lower mortgage rates,” Yardeni wrote, but last year’s experience “serves as a cautionary tale.”