How Interest Rate Reductions Really Work (And Why Mortgage Rates Don’t Drop Overnight)

Every time the Federal Reserve announces an interest rate cut, the headlines light up: “Fed cuts rates by 0.25%!”

Naturally, many people assume that if mortgage rates were sitting at 6.25% yesterday, they should magically be 6.00% today. Sounds simple, right? Unfortunately, that’s not how it works.

Here’s the breakdown:

1. The Fed Doesn’t Control Mortgage Rates

When the Fed makes a change, they’re adjusting the federal funds rate — the rate banks charge each other for overnight borrowing. That’s not the same as mortgage rates. Mortgage rates are tied to long-term bonds and mortgage-backed securities (MBS), which trade on Wall Street.

2. Mortgage Rates Move on Expectations, Not Announcements

By the time the Fed makes an official cut, the financial markets usually already “priced it in.” In other words, investors have been anticipating the move for weeks or months. If the cut was expected, mortgage rates may not move much at all. Sometimes they even go up if investors think inflation will stick around longer.

3. Think of It Like the Stock Market

If Apple announces new iPhones every September, the stock doesn’t skyrocket each time — investors already knew it was coming. Mortgage rates work the same way. They respond more to economic data (like jobs reports, inflation numbers, and global events) than to the Fed’s announcement alone.

4. Why It Still Matters to You

While a Fed rate cut doesn’t directly slash mortgage rates, it does influence the economy as a whole:

• Lower rates make borrowing cheaper for banks, businesses, and consumers.

• That can cool or heat up economic activity.

• Over time, these shifts filter into mortgage rates, but not in a clean, immediate way.

The Bottom Line

A Fed rate cut is like adjusting the thermostat in your house. Turn it down, and the room will eventually cool — but it doesn’t happen instantly. Mortgage rates react to the climate of the economy, not just the flip of a switch in Washington.

💬 What do you think?
Were you surprised to learn that Fed rate cuts don’t directly equal lower mortgage rates? Drop your thoughts in the comments — I’d love to hear your take.

📩 Thinking of buying or refinancing and want to know where rates actually stand today? Send me a message — I’ll help you cut through the noise and focus on what matters for your situation.