{"id":17785,"date":"2025-08-28T10:14:54","date_gmt":"2025-08-28T17:14:54","guid":{"rendered":"https:\/\/canary.kcprod.info/blog\/?p=17785"},"modified":"2026-03-23T15:56:48","modified_gmt":"2026-03-23T22:56:48","slug":"mortgage-rates-and-effr","status":"publish","type":"post","link":"https:\/\/canary.kcprod.info/blog\/mortgage-rates-and-effr\/","title":{"rendered":"Hoping for Lower Mortgage Rates? Here\u2019s Why a Rate Cut Might Not Help"},"content":{"rendered":"\n

If you\u2019re shopping for a home, you\u2019re probably uniquely attuned to interest rates, because getting a lower rate on your mortgage can save you a lot<\/em> of money over the life of your loan. With the Federal Open Market Committee (FOMC) poised to potentially lower rates in September, you might be hoping mortgage rates are about to drop, too. That could happen, but it also might not. The surprising truth is that mortgage rates are not as closely tied to the <\/strong>federal funds rate<\/strong><\/a> (the benchmark interest rate set by the Federal Open Market Committee, or FOMC) as you might think. <\/strong>Instead, they\u2019re more correlated to 10-year Treasury yields.<\/p>\n\n\n\n

Wealthfront is rolling out a simpler way to get a great mortgage rate. Use our calculator to get your estimated rate for CO, TX, or CA in seconds<\/a><\/div><\/div>\n\n\n\n

Interest rates, and mortgage rates more specifically, can make a big difference in your financial life. That\u2019s why I\u2019ve published work on how mortgage rates affect middle-class American households and how investors form their expectations about interest rates. I tackle these questions and related ones in my capacity as the A. James Clark Chair in Global Real Estate at Georgetown University and as the Director of Research at Georgetown\u2019s Steers Center. In this post, I\u2019ll explain what you need to know about why a lower federal funds rate might not immediately translate to lower mortgage rates.<\/p>\n\n\n\n

It\u2019s not just about the federal funds rate<\/h2>\n\n\n\n

The FOMC meets eight times each year to determine whether it will make changes to the federal funds rate. As you may know, the federal funds rate is the rate at which banks lend money to each other for very short-term loans. It is expressed as a target range, and the effective federal funds rate (or EFFR) falls within that range. Changes to the federal funds rate tend to garner a fair amount of media attention, and they affect a variety of consumer interest rates. But an 0.25% reduction in the federal funds rate does not necessarily translate into a corresponding drop in mortgage rates.<\/p>\n\n\n\n

Instead, mortgage rates are far more closely correlated to 10-year Treasury yields than the EFFR. <\/strong>This is because 10-year Treasuries are priced based on expectations about how the economy will do over the following 10 years, which is much closer to the time horizon on 30-year mortgages than to the short-term time horizon on which the EFFR is based. In fact, most mortgage originators use 10-year Treasury yields directly in their mortgage rate-setting formulas because they treat those yields as a measure of how investors think the economy will perform over the medium to long term. <\/p>\n\n\n\n

The chart below plots the EFFR against 10-year Treasury yields and 30-year fixed rate mortgage rates for the time period from July 1985 to July 2025 to illustrate these relationships. As you can see, while the three rates are correlated, 30-year fixed rate mortgages can fluctuate independently from the EFFR\u2014and during periods where the EFFR is very low, 30-year fixed rate mortgage rates tend to remain higher. Meanwhile, 10-year Treasury yields and 30-year fixed rate mortgage rates tend to move together in a fairly predictable fashion. In short, a FOMC decision to raise or lower the federal funds rate probably won\u2019t translate directly into a corresponding increase or decrease in 30-year fixed rate mortgage rates. <\/strong><\/p>\n\n\n\n

\"\"\/<\/figure>\n\n\n\n

What moves 10-year Treasury yields (and mortgage rates as a result)?<\/h2>\n\n\n\n

If 10-year Treasury yields and 30-year mortgage rates are so closely correlated, then it follows that predicting changes in the 10-year Treasury yield should be able to help you predict what\u2019s coming for mortgage rates. Unfortunately, doing this is not straightforward\u2014there is still debate among academic institutions and economists over the factors that drive long-term Treasury yields. While the EFFR is influenced by short-term economic changes, long-term Treasury yields are broadly determined by the law of supply and demand, just like any other good or service in the economy. <\/p>\n\n\n\n

Demand for Treasuries goes up when investors want to invest in safer assets, which pushes prices up and yields down. Demand for Treasuries goes down when investors are less interested in safer assets, which pushes prices down and yields up. When the Treasury issues more Treasuries (increasing supply), they\u2019re seen as slightly riskier, so yields go up (and prices go down) because investors will only buy new Treasuries if they think they\u2019re being fairly compensated for that risk.<\/p>\n\n\n\n

So what needs to happen for 10-year Treasury yields and mortgage rates to go down? Here are three scenarios that could make this more likely:<\/p>\n\n\n\n