Why Mortgage Rates Haven’t Followed the Fed
The Fed Cut Rates, Didn’t They?
When the Federal Reserve met in early December, a 9-3 decision was passed to cut interest rates by 25 basis points, bringing the federal funds target range to 3.5%–3.75%. Two officials opposed the cut out of concern that inflation remains too high, while one dissented for the opposite reason - that the labor market is weakening and there actually should have been a more aggressive cut. (1)
That split matters. It signals that the Fed itself is increasingly uncertain about where the economy is headed, and that uncertainty helps explain why mortgage rates haven’t followed the Fed’s move.
Despite the rate cut, mortgage rates have barely moved. The reason is simple but often misunderstood: the Fed does not directly control mortgage rates. The federal funds rate mainly affects short-term borrowing, such as overnight bank lending, credit cards, HELOCs, and some commercial loans. Thirty-year fixed mortgage rates are driven by long-term bond markets, especially the 10-year U.S. Treasury. When those bond markets don’t move, mortgage rates don’t either, regardless of Fed headlines.
Right now, bond markets are signaling caution. Inflation has cooled significantly from its 2021–2022 peak, but it remains above the Fed’s 2% target, with recent readings hovering in the high-2% to low-3% range (2). At the same time, the labor market is no longer accelerating, and fears surrounding an AI bubble are prevalent. While unemployment remains low and job growth continues, the trend is cooling. Hiring has slowed, wage growth is moderating, job openings have declined, and layoffs, while not surging, are no longer at historic lows.
This is the tension the Fed is grappling with. The labor market isn’t breaking, but it’s losing momentum. Inflation isn’t surging, but it isn’t fully defeated. In that environment, investors aren’t rushing into long-term bonds, which keeps Treasury yields and, subsequently, mortgage rates elevated.
However, there’s a subtle shift worth watching. Alongside its rate cut, the Fed announced it will begin purchasing short-term Treasuries, injecting roughly $40 billion into the system to stabilize liquidity (3). Officials stress this is not full quantitative easing, but it does mark a step away from tightening. If economic or housing conditions worsen, the Fed could eventually expand those purchases to long-term Treasuries or mortgage-backed securities, actions that would aid in pushing mortgage rates lower. That scenario isn’t imminent, but the possibility is there.
What This Means for Buyers
The takeaway for buyers is straightforward: waiting for rate cuts isn’t a strategy. Even as the Fed eases short-term rates, mortgage rates are likely to remain in the low-6% range unless inflation falls decisively or the economy enters a recession. In the event of a recession, many move their money out of stocks and bonds and into US Treasuries - which is seen to be a very secure asset. With increased demand for treasuries, the offered yield decreases.
In the meantime, higher rates have reshaped the market in important ways. Buyer competition has cooled, bidding wars are less common, and price flexibility (although largely dependent on market segmentation) is prevalent. At the same time, inventory has faced its own challenges since rates began rising in 2022. Many homeowners who bought or refinanced during the COVID era locked in mortgage rates near 2–3%, creating a powerful incentive to stay put. Covid-era rates have effectively locked in a large portion of homeowners in Miami, and has effectively kept resale inventory relatively thin.
For buyers, this creates a nuanced opportunity. While inventory may continue to be tight, the homes that do come to market are often met with less buyer competition, giving well prepared buyers meaningful leverage. Securing a strong purchase price, favorable terms, or seller concessions today can matter far more over the long term than waiting for a marginal rate improvement that may not arrive soon. This is a market that rewards preparation. Buyers who understand the landscape and act strategically can quietly do very well, while those waiting on interest rate cuts risk missing out on the right home for them. As the saying goes, “marry the house, date the mortgage”.
https://www.nytimes.com/live/2025/12/10/business/federal-reserve-interest-rates
https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20251210.htm
https://markets.businessinsider.com/news/stocks/fed-rmp-reserve-management-purchases-balance-sheet-qe-treasury-bills-2025-12?op=1
