Why mortgage rates stay high despite Fed Rate cuts

When the Federal Reserve raised interest rates to combat inflation in 2022, borrowing became more expensive almost overnight. Credit card rates climbed, auto loans grew pricier, and home loans followed suit. But now, even as the Fed signals a shift toward cutting rates, mortgage rates have remained stubbornly high. For prospective homebuyers waiting for relief, this disconnect is frustrating—and confusing.

At the center of this puzzle is a key financial truth: while the federal funds rate influences borrowing costs across the economy, mortgage rates don’t track it directly. They’re shaped primarily by bond market behavior, investor sentiment, and the yield on the 10-year U.S. Treasury note. If you’re trying to time a home purchase or make sense of your refinancing options, it’s important to understand what actually drives mortgage rates—and what doesn’t.

The Fed’s decisions are meant to nudge broader economic trends, not dictate loan pricing line by line. When Chair Jerome Powell signaled a series of rate cuts starting in late 2024, the expectation was that lower policy rates would eventually pull down borrowing costs, including mortgage interest. That hasn’t fully happened.

Part of the reason lies in how lenders price mortgages. Unlike credit cards or home equity lines of credit, which are often tied directly to the federal funds rate, fixed mortgage rates are more dependent on the long-term bond market. Specifically, they tend to follow the 10-year Treasury yield, which reflects investor expectations about inflation, growth, and monetary policy over a longer horizon.

In short, while the Fed can shape the mood, it doesn’t set the stage alone. The Treasury yield must fall too—and stay low—for mortgage rates to respond meaningfully.

Mortgage lenders need a reliable benchmark to anchor their pricing. The 10-year Treasury note, backed by the full faith and credit of the U.S. government, is seen as one of the safest investments available. That perceived safety makes it a trustworthy base for lenders setting long-term interest rates on mortgages.

But the Treasury yield isn’t fixed. It moves with the market—driven by demand for government debt, expectations about inflation, and global investor appetite for U.S. assets. In times of economic uncertainty or political volatility, investors may rush to buy Treasuries, pushing prices up and yields down. But that doesn’t automatically mean mortgage rates fall.

That’s because lenders add a margin—a buffer over the Treasury yield—when setting your mortgage rate. This spread, which typically runs between 2% and 3%, covers their overhead, profitability, and risk. If markets are jittery, or if default risk is expected to rise, lenders widen this spread to protect themselves.

Right now, the 10-year Treasury yield hovers around 4.38%, while average mortgage rates remain closer to 7%. That’s a margin of about 2.5%—slightly above historical norms. Why? Because lenders are hedging against a mix of risks: lingering inflation, uncertainty about the Fed’s true path, potential for economic slowdown, and memories of recent loan losses.

According to data from the Federal Reserve Economic Database (FRED), these spreads tend to widen during times of economic distress. During the 2008 financial crisis, the early months of the COVID-19 pandemic, and the inflation shock of 2022, mortgage margins rose sharply. Higher spreads offset expected loan delinquencies, falling home values, and the threat of foreclosure losses.

Lenders don’t just look at today’s yield—they look ahead. If they expect more volatility, they price that into the margin, regardless of what the Fed says it plans to do.

Inflation cuts into the real value of loan repayments, meaning lenders get paid back in dollars worth less than when the loan was issued. To protect their returns, lenders raise margins during inflationary periods. Even if inflation shows signs of cooling, skepticism lingers. Many mortgage lenders won’t reduce their risk buffer until they’re convinced inflation is sustainably under control.

Additionally, housing market behavior adds pressure. When fewer buyers can afford to borrow at higher rates, lenders face lower volume. But their fixed costs remain the same. To preserve profitability, they keep margins elevated.

Loan performance matters too. Defaults and foreclosures are still below peak-crisis levels, but any sign of rising risk—from job losses to regional housing corrections—can spook lenders into raising margins. The system reacts to caution before confidence returns.

For mortgage rates to decline meaningfully, several things must happen together. First, Treasury yields must drop—and stay lower. This would reflect both improved inflation expectations and reduced investor anxiety. Second, lender margins must compress. That requires confidence in the housing market, economic resilience, and borrower stability.

Finally, the broader political and fiscal landscape matters. If U.S. debt levels continue to grow unchecked, Treasury yields may stay elevated as investors demand more compensation for holding government debt. Conversely, if the federal deficit narrows and markets perceive more fiscal discipline, yields could drop further—supporting lower mortgage rates.

Fed policy, then, is just one part of a complex equation. Forward guidance helps shape expectations, but it cannot override the structural realities of capital markets, lender risk models, and consumer sentiment.

If you’re a potential buyer or looking to refinance, tracking the federal funds rate gives you part of the picture—but not the full view. More relevant is the movement of the 10-year Treasury yield and news about mortgage spread behavior.

You might also ask:
– Are lenders tightening or loosening underwriting standards?
– Are home prices stabilizing, rising, or falling in your target area?
– Is inflation retreating enough to trigger a real policy shift and market repricing?

These factors shape not only what rate you’re offered—but how sustainable it is relative to your long-term budget.

It’s easy to get discouraged when mortgage rates don’t move with headlines. But shifts are still happening under the surface. If inflation moderates and investor confidence returns, bond yields could fall and lender margins might begin to compress. That process may be gradual, but for long-term planners, it’s worth watching closely. Rather than trying to time the market, the more strategic move is to track your affordability threshold and prepare to act when conditions improve—even slightly.

Because in the end, what matters most isn’t just the rate you lock in. It’s whether the home you buy fits your financial plan—even when the market isn’t cooperating.