Fed Cuts Rates, Will Mortgage Rates Follow in 2025?

by Xavier Williams

The Federal Reserve Cut the short term federal funds rate by 0.25% to a range of 4.25%-4.50%. Yet mortgage rates actually increased after the Federal Reserve cut short term interest rates.

Have you ever wondered why mortgage rates, which are the interest you pay on home loans, aren’t getting lower like they used to in the past? Let's break it down in simple terms.

In a Nutshell

Mortgage rates probably won’t drop back to the 3-4% range anytime soon because:

Mortgage rates follow the 10-Year Treasury yield, not the Fed’s short-term rate
Inflation is still a problem, so investors are moving away from bonds.
Bond prices and yields move in opposite directions. When prices fall, yields go up, which pushes mortgage rates higher.
The Fed’s pandemic bond-buying spree is over, and now they’re selling bonds instead.
The government is running a deficit, so it has to sell more bonds, which keeps yields high.

Read on for the full break down

Mortgage rates are a bit like a see-saw. They go up and down based on different factors

This Chart Shows the Average 30 Year Mortgage Rate in the U.S. from 2004 - 2024

The main factor that moves mortgage rates up and down is whats called the ten year treasury yield.

This is derived by an investment instrument called the U.S. Treasury Bond. A bond is a loan (or IOU) from the U.S. Government to investors.

For example, if you wanted to earn a profit on cash you have available, but don't want to invest into riskier assets like stock or crypto, you could buy a 10 Year Treasury Bond from the U.S. Government.

In exchange for letting the government borrow your cash, the government will pay you say, 4.5% annual interest on your money every 6 months. At the end of 10 years you get your entire initial investment back.

This 4% interest rate that the U.S. Government is offering in exchange for loaning them that money, is what's called the yield.

This Chart Shows the Market Rate Yield on the 10 Year U.S. Treasury from 2004 - 2024

Why Investors Buy U.S. Treasuries

The risk of losing your investment is much lower, than investing in say an individual business through stock.

U.S. treasuries are considered the safest investment an investor can make since the U.S. government has never defaulted on its debt obligations (on top of being the most wealthy country in the world).

Why Does the U.S. Government Sell U.S. Treasuries?

The U.S. government issues treasury bonds to finance government spending whenever the federal budget is in a deficit.

The U.S. Federal Government is in a deficit when the government brings in less tax revenue from tax payers like workers and businesses, than it spends on government services like healthcare, social security payments, & building/repairing public owned buildings and facilities like roads, bridges and parks.

When the government is in a surplus, it means there is more tax funds coming into the government than it is spending.

The U.S. has been running a **significant** deficit for close to the last 25 years

Why Mortgage Rates will not drop into the 3-4% range we experienced during the COVID Pandemic in 2025 or even 2026.

To understand why rates aren’t dropping, we need to think about what happened during COVID-19. Back then, the Federal Reserve bought a lot of these bonds to pump money into the economy to help keep it running. Think PPP loans, think stimulus checks, supplementary unempoyment insurance, etc.

Let's take a look at the huge amount of bonds the Federal Reserve was buying during the Pandemic:

Huge Increase in the amount of U.S. Treasuries the Federal Reserve is Holding during the Pandemic

When Large Amounts of Bonds are Purchased, Bond Yields Fall

That's because the bond market is driven the same as any other market based asset: supply and demand. When more investors are buying bonds than are being sold, it causes the price of these bonds to go up.

When the price of bonds go up, the government doesn't need to offer higher interest rates (yield) to entice investors to buy the bonds to finance government debt. There are plenty of buyers, which allows the government to offer lower yields.

Check out the yield below of the 10 year treasury when the Federal Reserve was purchasing bonds during the pandemic:

Massive Drop in 10 yr U.S. Treasury Yields as the Fed Mass Purchased Treasuries Allowed Mortgage Rates to Hit Historical Lows

Mortgage Rates & Home Affordability Take a Hit as the Fed Continues it's Fight Against Inflation

But now, because prices on everything went up (a.k.a. inflation) after the pandemic, the government has been selling treasuries to help remove money out of the economy to bring down inflation

Post-Covid Inflation in the U.S. Reached 3x the Fed's Target Goal of 2% Inflation

This is an attempt to avoid inflation spiking to catastrophic levels seen in the 70's & 80's's when the U.S. experienced life sucking inflation. This is also the period when mortgage rates hit their all time highs into the 18%s.

In the 70's & 80's Prices Were Rising as Much as 10%/yr, Compare to Roughly 6% During the spike Post-Covid

The 30 Year Average Fixed Mortgage Rate in the U.S. hit Almost 19% in 1981

This move to fight inflation, has caused mortgage rates to increase as the Fed allows bonds to roll off it's balance sheet.

Summary

Mortgage rates are not likely to fall to the 3-4% range seen during the COVID pandemic due to a variety of factors:

Mortgage rates follow the yield of the 10 Year U.S. Treasury, not the short term Federal Funds Rate that the Federal Reserve controls
Inflation concerns are not yet fully controlled in the economy, as a result investors are selling bonds to move into riskier assets such as stock, real estate and crypto in attempt to outpace inflation
Bond prices & yields have an inverse relationship; when more investors sell bonds than buy, it causes the price of those bonds to go down, and the yield to go up. This causes mortgage rates to go up
The historically low mortgage rates seen during the COVID pandemic were in large part, a result of the Federal Reserve buying astronomical amounts of U.S. Treasuries to fund stimulus & mortgage bonds, pushing the price of the bonds up and lowering the yields to historic lows
The Fed now has to reverse the enormous amount of financial stimulus provided during the pandemic by selling off or letting their bond holdings roll off their balance sheet without reinvestment.
The U.S. Government is still spending more in government services than it brings in in tax revenue. The government will need to create more Treasuries to sell off and finance this debt. This increase in supply is likely to cause bond prices to drop and yields to rise (or not drop as much), resulting in an increase in mortgage rates

So, for now, mortgage rates are staying high because of these big money moves and choices. If we want to see them go down, some big changes would have to happen in how the government handles its money and bonds.

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