When news breaks that the Federal Reserve is cutting interest rates, many hopeful homebuyers assume mortgage rates will tumble right along with them. But as every seasoned real estate professional knows, the relationship between the Fed rate and mortgage rates is more nuanced—and understanding that distinction can help you guide clients with confidence.

The Fed Doesn’t Set Mortgage Rates

While the Federal Reserve (the “Fed”) influences the broader economy, it doesn’t set mortgage rates directly. The Fed controls the federal funds rate—the short-term rate at which banks lend to one another to meet reserve requirements. Think of it as the wholesale price of money between banks, not the retail price consumers pay for loans.

When the Fed raises or lowers this rate, it impacts borrowing costs across the economy. However, mortgage rates, especially long-term ones like 30-year fixed loans, depend on other market forces beyond the Fed’s direct control.

Enter the 10-Year Treasury Note

If there’s one indicator real estate agents should watch to anticipate mortgage rate trends, it’s the 10-Year U.S. Treasury yield. This benchmark reflects investor confidence in the economy and is closely tied to movements in mortgage rates.

When investors expect strong economic growth or higher inflation, they demand higher returns on long-term bonds, pushing Treasury yields (and mortgage rates) higher. When uncertainty or recession fears rise, investors flock to safer assets like Treasuries, driving yields and mortgage rates lower.

In short, mortgage rates tend to move in the same direction as the 10-Year Treasury yield, not necessarily the Fed’s rate decisions.

Why Mortgage Rates Don’t Always Drop When the Fed Cuts

Even when the Fed lowers rates, mortgage rates may hold steady or even climb. That’s because mortgage lenders factor in:

• Investor confidence: If investors expect inflation to rise, they’ll demand higher yields even in a lower-rate environment.
  
• Risk premiums: Mortgages carry more risk than government-backed securities, and investors want compensation for that uncertainty.
  
• Market conditions —such as mortgage-backed securities, investor profit margins, and the costs of guarantees or fees — also influence consumer rates.
  

This layered structure—from the federal funds rate to the 10-Year Treasury yield to mortgage rates — explains why buyers can’t assume that Fed cuts will instantly make homes more affordable.

How Real Estate Agents Can Use This Knowledge

As a trusted advisor, your role is to help clients interpret the headlines. When clients ask, “Will mortgage rates drop now that the Fed cut rates?” you can explain that while lower Fed rates can influence market sentiment, mortgage rates follow a more complex path tied to investor behavior, inflation, and economic outlook.

Encourage buyers to focus less on timing the market and more on long-term goals, affordability, and personal readiness. Remind them that rate fluctuations are inevitable—but a well-structured home purchase plan and a skilled agent can make any market manageable.

Empower Your Business with Fathom Realty

At Fathom Realty, we equip agents with the tools, technology, and insights to guide clients through every market shift. Whether rates are rising or falling, our agent-first culture and business systems help you build stronger relationships and close more deals.

Join Fathom Realty today and elevate your business with a brokerage that meets you where you are—and helps you grow beyond where you’ve been. Learn more at fathomcareers.com.