The Fed Is Cutting Rates. Why Aren't Mortgage Rates Falling?
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Why are 30‑year mortgage rates not falling despite Fed rate cuts?
The Federal Reserve has dropped interest rates by three-quarters of a percentage point since September, but mortgage rates have not followed suit.
Short-term rates and long-term rates are connected with each other, but just because short-term rates are falling doesn't mean long-term rates are as well. And more recently, long-term rates have been rising in response to a lot of different factors.
We'll ask WSJ's Ben Eisen to explain what that means for prospective homebuyers and when they could see some relief after the break.
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While the Federal Reserve has lowered interest rates for the second straight session, 30-year mortgage rates on average have been rising since early October and are approaching 7%. Wall Street Journal Deputy Personal Finance Bureau Chief Ben Eisen joins me to explain why. Ben, what's the difference between mortgage rates and the interest rates that the Fed lowered on Thursday?
So the rates that the Federal Reserve lowered on Thursday is the federal funds rate, and that's a bank lending rate, which is a short-term rate. Mortgage rates are based on a long-term rate. They tend to move up and down along with the 10-year Treasury yield, which has been rising.
In your story, you write that the central bank wants to push down the cost of borrowing for homes, cars and other purchases. So why haven't mortgage rates moved lower with the other interest rates?
So the Fed does want to lower borrowing costs for consumers, but they can't directly control that. Short term rates and long term rates are connected with each other. But just because short term rates are falling doesn't mean long term rates are as well. And more recently, long term rates have been rising in response to a lot of different factors. One, the Federal Reserve is cutting rates when the economy is strong. The outlook for growth looks pretty good. That helps push up long term interest rates. Additionally, you had the election of President-elect Donald Trump. And, you know, some of his stated policy goals are also seen as pushing up long term rates because investors think deficits will grow.
Inflation could rise along with the tariffs he's proposed. All of that factors into these higher long-term rates, which in turn push up mortgage rates.
It seems like there's a disconnect because stocks also rose last week. But would higher mortgage rates cut into the housing market, which is such an important economic indicator?
Well, the housing market has been pretty cool for a number of years now, and home sales have been declining. People haven't been putting their houses on the market, and yet the economy continues to chug along. So yes, the housing market is one very important part of the economy, but it is not the only part of the economy.
How common is it for mortgage rates and the other rates to move in opposite directions?
It really depends what's going on in the world. And right now is sort of a unique time. One thing that's unique about it is that the Federal Reserve is cutting rates at a time when the economy is somewhat strong. Oftentimes when the Fed is cutting rates, the economy is weakening rapidly and the Federal Reserve is racing to kind of contain a weakening economy.
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