Why mortgage rates are going up despite the Fed’s interest rate cut

Americans saw mortgage rates soar during the Federal Reserve’s aggressive campaign to fight inflation, leading many to hope for a reprieve after the central bank finally cut the federal funds rate last month for the first time in four years.

But instead of declining, mortgage rates have marched higher for the past three weeks, with the benchmark 30-year fixed surging to 6.44% as of Freddie Mac’s latest reading.

Mortgage rates spiked in 2022 and 2023 as the Fed hiked interest rates. In the span of just 16 months, the central bank approved 11 rate increases – the fastest pace of tightening since the 1980s. 

While the federal funds rate is not what consumers pay directly, it affects borrowing costs for home equity lines of credit, auto loans and credit cards. 

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“Fixed mortgage rates move in relation to long-term interest rates like the yield on 10-year Treasury notes, both of which respond to the outlook for economic growth and inflation over the coming years,” Bankrate’s chief financial analyst, Greg McBride, told FOX Business. “Mortgage rates tend to move well in advance of any action the Federal Reserve takes with short-term interest rates, not in response.”

McBride noted that mortgage rates dropped a full percentage point between May and September from 7.2% to 6.2%, in expectation of coming Fed interest rate cuts. 

“The Fed’s more aggressive half-point rate cut in September increased the odds that the economy continues to grow, avoids recession, and that inflation could be higher than anticipated,” he said. “With that outlook, long-term interest rates – both Treasury yields and mortgage rates – have moved higher, reversing some of the decline seen in preceding months.” 

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McBride added that even now, mortgage rates have only returned to where they were in mid-August and remain significantly lower than they had been as recently as May.

As for the latest increases, Hannah Jones, senior economic research analyst at Realtor.com pointed to the most recent employment and inflation data both coming in higher than expected, which put upward pressure on mortgage rates.

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“Rates have shown considerable volatility lately, and may continue to do so as the market digests upcoming PCE inflation and the October jobs report in the next couple of weeks,” Jones told FOX Business. “Overall, we still expect a downward long-term mortgage rate trend.”