If you’ve been watching the headlines, you’ve likely seen the assumption: “When the Fed cuts its federal funds rate, mortgage rates will drop.” It sounds logical - cheaper short-term rates should flow downstream, right? But the real world is more complicated. Over the past two decades (and especially in recent years), there have been notable times when the Fed cut its benchmark rate - yet 30-year mortgage rates increased, or at least failed to decline meaningfully. Let’s unpack why.

1 | How Mortgage Rates Are Determined: The Big Picture

First, a refresher on how mortgage rates come about.

• The federal funds rate is the interest rate at which banks lend overnight to one another. It influences short-term borrowing costs, which affects many parts of the financial ecosystem - but it does not directly control long-term rates or mortgages.
• A more direct driver of mortgage rates is the bond market, especially U.S. Treasury yields (especially the 10-year Treasury). When investors demand higher yields on Treasurys, mortgage rates tend to follow.
• Mortgage lenders bundle home loans into Mortgage-Backed Securities (MBS), which are sold in capital markets. These MBS must offer yields competitive with other long-duration assets. The “spread” between Treasury yields and mortgage rates incorporates risk premiums, liquidity concerns, and credit risk.
• Expectations about inflation, economic growth, monetary policy, credit supply, and global demand for safe assets all weigh heavily on bond yields - often more so than the Fed’s short-term rate decisions.
  

In short: Mortgage rate ≈ 10-year Treasury yield + spread, and that spread adjusts with market conditions.

2 | Two Recent Case Studies: Fed Cuts, But Mortgages Rose

Here are two recent examples where the conventional expectation (Fed cuts → mortgage rates fall) did not play out:

a) September 2024 Fed Cut

In September 2024, the Federal Reserve cut its federal funds rate by 50 basis points (0.50 %) in response to slowing growth concerns. Many expected mortgage rates to decline sharply. Instead, as the Fed’s cut was announced, rates on 30-year mortgages rose from about 6.09% to as high as 6.84% by November. Fannie Mae

Why? Because investors anticipated that inflation and economic pressures might reverse course, causing long-term yields to move higher. The bond market didn’t “buy in” to the idea that rates would remain low. The 10-year Treasury yield moved upward, pulling mortgage rates higher. Fannie Mae

b) Late-2025 (Following the Fed Cut in September 2025)

The Fed again cut its benchmark rate by 25 basis points in September 2025. Observers expected mortgage rates to finally follow. But rather than plummet, mortgage rates either held steady or increased slightly, despite the short-term rate cut. AP News+2Wolf Street+2

One analysis by Wolf Richter notes that after the rate cut, the 30-year fixed mortgage rate jumped by ~22 basis points - more than the corresponding increase in the 10-year Treasury yield - suggesting bond market volatility and inflation expectations overpowered the Fed move. Wolf Street

The takeaway: bond markets are more reactive to inflation outlooks, issuance of Treasurys, supply-demand imbalances, and global capital flows than to central bank tweaks to the federal funds rate.

3 | Why These “Counterintuitive” Moves Occur

Here’s a breakdown of the forces at work:

• Expectations Already Priced In: Markets are forward-looking. If a Fed cut is widely anticipated, long-term bond yields may already reflect that expectation. So when the cut happens, Treasury yields may not drop - or may even rise - because markets reassess inflation or growth risks.
• Inflation Risk & Term Premiums: If inflation pressures are elevated, investors demand extra compensation for locking money up long-term (i.e., a higher term premium). Even with a Fed cut, that premium can push yields upward.
• Supply of Treasurys and Debt Issuance: When the government issues more debt, there’s more supply of longer-term bonds, which can push yields upward, given fixed demand.
• Flight to Safety or Global Flows: In unsettled times, investors may flee to U.S. Treasurys or abandon risk assets, affecting yields inversely. Sometimes that pushes yields down; in other cases, it spurs demand for higher yields.
• Spread Adjustments: The spread between Treasurys and mortgage-backed securities can widen due to credit risk perceptions, liquidity constraints, or investor sentiment. Even if Treasury yields fall, a rising spread can offset or reverse gains.
• Yield Curve Dynamics: If the yield curve steepens or flattens, relative movements between short and long rates may have different trajectories. A cut in short-term rates may not result in lower long-term yields if the curve is behaving anomalously (inversion or steepening).
  

Thus, the connection between the Fed’s policy rate and mortgage rates is indirect and mediated by markets.

4 | What This Means for Luxury Homebuyers and Owners

As someone engaged with high-end coastal real estate (Watch Hill, Weekapaug, Charlestown, Stonington, Mystic), the implications are significant:

• Don’t assume rates will drop just because the Fed cuts. Mortgage rates may remain stubborn, or even go up, depending on bond market behavior.
• Focus on timing vs. fundamentals: Rather than trying to “time” a rate bottom, it’s often smarter to act when you find the property you want, assuming your financing allows flexibility.
• Refinancing is always an option: If rates do fall later, you can refinance. But if you're priced out of a property because you waited, that upside is lost forever.
• Work with a trusted local expert: Real estate markets are hyperlocal. The way a national rate move translates into your local submarket (e.g. Watch Hill vs. Weekapaug) can differ. A seasoned broker who understands local dynamics is essential to navigate price sensitivity, buyer behavior, and financing strategy.
• Expect volatility: Be mentally prepared for twists. A rate cut doesn’t guarantee relief; sometimes the opposite happens. Knowing how bond markets and inflation expectations affect your mortgage can protect you from surprises.
  

5 | Key Takeaways & Strategy Tips

1. Mortgage rates ≠ Fed rate. The 30-year fixed rate is tied more directly to Treasury yields and market conditions than to the Fed’s overnight rate.
2. Don’t count on rate cuts to drag rates downward. Sometimes they don’t. In fact, last time, mortgage rates rose.
3. Act when you find the right property. In luxury markets with tight inventory, waiting can cost you a great opportunity.
4. Refinance if rates fall. You can always move to a better rate later if the market cooperates.
5. Partner with a local expert. You want someone who knows your neighborhood, sees buyers’ intention, and understands how macro moves filter into your area.
   
   

If you’d like to dive deeper into recent mortgage rate trends, examine how these dynamics have played out specifically in southern Rhode Island or eastern Connecticut, or explore whether now is the right moment for your next property move — I’m here for that conversation. Reach out anytime.