No Fed Cut. But How Does the Fed Funds Rate Affects Mortgage Rates?

At the July 2025 Fed meeting, Jerome Powell and the Federal Reserve once again held the federal funds rate steady—despite intense public pressure from President Donald Trump to cut it. Going into the meeting, almost no one in the market expected a cut: according to the CME FedWatch Tool, over 96% of market participants believed the Fed would hold rates steady. And while Trump called loudly for a rate cut posting “MUST NOW LOWER THE RATE,” on Truth Social, he likely knew the outcome in advance.

But here’s the thing: mortgage rates don’t always follow the Fed’s lead. In fact, many homebuyers and even financial commentators misunderstand the real relationship between Fed policy and the 30-year fixed mortgage rate. Let’s set the record straight.

The Fed Doesn’t Set Mortgage Rates

The Federal Reserve sets the federal funds rate, which governs short-term lending between banks. That benchmark affects products like credit cards, auto loans, and SOFR. But 30-year mortgage rates are long-term financial instruments. They march to the beat of a different drum—specifically, the 10-year Treasury yield.

Mortgage rates are primarily influenced by movements in the 10-year Treasury note, which reflects investors' expectations for future inflation, economic growth, and short-term interest rates over the next decade. When investors expect the Fed to cut rates in the future, Treasury yields fall, and mortgage rates tend to follow.

That correlation exists because mortgage-backed securities (MBS)—which pool home loans and sell them to investors—compete with Treasuries for investor capital. When Treasuries yield falls, MBS become more attractive, leading to increased demand and lower yields on mortgage bonds as well. Lenders can then offer borrowers lower mortgage rates while maintaining profitability.

However, this relationship isn’t perfect. Market sentiment, risk appetite, and Fed balance sheet activity (like quantitative tightening or MBS runoff) can distort the link between Treasury yields and mortgage rates. Additionally, geopolitical shocks or inflation surprises can shift bond markets rapidly—leading to mortgage rate volatility even if the Fed is on hold.

Bottom line: while the Fed influences broader market conditions, long-term mortgage rates are more directly tied to forward-looking investor expectations and the supply/demand dynamics in the bond market.

Why Mortgage Rates Fell Before the Fed Cut in 2024

The decline in mortgage rates during the first half of 2024 was driven not by action, but by expectation. The Fed had yet to cut rates, but financial markets were already betting it would. Traders in the bond market began pricing in future monetary easing, which drove down yields on 10-year Treasuries.

Lower Treasury yields, in turn, pushed mortgage rates lower. That shift created renewed enthusiasm in the housing market, with many buyers jumping in on the assumption that mortgage rates would continue falling once the Fed officially pivoted.

But it wasn’t just a hunch. Inflation had begun to cool, wage growth was moderating—and while that suggested potential Fed pivot, the labor market showed signs of fraying. In July 2024, the unemployment rate rose to 4.3%, its highest level since September 2021. Wage gains also cooled, with annual hourly earnings rising 3.6%, the slowest pace in over three years.

Despite weaker job growth, markets prioritized the broader narrative—inflation decelerating, cooling wage momentum, and expectations that the Fed would cut by September. That anticipation triggered a self-reinforcing cycle: increased Treasury demand lowered yields, which pulled down mortgage rates—even as unemployment ticked up.

In other words, mortgage rates fell because markets believed the Fed was done hiking and would soon begin cutting—even before the Fed confirmed it. It was a case of the bond market front-running the Fed’s next move.

Then in September 2024, the Fed finally delivered its long-awaited rate cut. But something unexpected happened: mortgage rates rose.

Why Mortgage Rates Rose After the September 2024 Cut

Following the Fed's 50-basis-point rate cut in September 2024, mortgage rates unexpectedly moved higher, with the average 30-year fixed jumping from 6.09% to 6.84% by November. The move surprised many homebuyers who assumed a Fed cut would result in lower borrowing costs.

The rise in mortgage rates after the first cut in over 4 years was driven by a sudden shift in market sentiment. Investors began pricing in the possibility that the Fed was nearing the end of its easing cycle and might not follow through with additional cuts. At the same time, strong economic data—particularly consumer spending and job growth—suggested the U.S. economy remained resilient, reducing the urgency for further monetary stimulus.

This altered the bond market's outlook. Yields on the 10-year Treasury began rising in response, which in turn pulled mortgage rates higher. As one analyst explained at the time, "Markets were too optimistic early on. The reality check came after the cut."

This episode highlighted a key lesson: it’s not the rate cut itself that matters—it’s what that cut signals to markets. In this case, the September 2024 cut caused investors to recalibrate their expectations, driving mortgage rates up rather than down.

This episode revealed a critical truth: actual rate cuts don’t matter nearly as much as what investors expect to happen in the future.

Why aren't mortgage rates the same as the 10-year Treasury yield then?  Understanding the Mortgage Spread

The 30-year mortgage rate doesn’t just mirror the 10-year Treasury yield. It includes a "spread" that reflects origination costs (the cost to operate the lender and close on your loan), servicing (the cost to maintain your loan), credit risk (an increase in your rate if you have a lower credit score or higher DTI), and investor demand (how many lenders actually want to loan you money—the higher the demand, the lower the rate).

There are two key spreads:

• The primary-secondary spread, which captures lender costs and profits

• The secondary spread, which reflects investor risk in mortgage-backed securities (MBS) compared to Treasuries

When economic uncertainty rises or the Fed reduces its MBS holdings, investors demand higher yields on mortgages, widening the spread. That can push mortgage rates higher even if the 10-year Treasury yield remains stable.

The 2025 Fight For Rate Cuts: Powell vs. Trump

Throughout 2025, the Federal Reserve has kept its benchmark interest rate unchanged at 4.25% to 4.5%, citing persistent inflation, tariff-driven price pressures, and a resilient labor market. By the time of the July meeting, this steady policy stance had become familiar—despite repeated public pressure from President Donald Trump to cut rates. Financial markets were unsurprised: 96% of CME-tracked participants predicted no change. But Trump once again made his dissatisfaction known.

“Too late,” Trump posted on Truth Social. “Must now lower the rate.” His criticism wasn’t new, but it came at a moment when economic data showed mixed signals: core inflation was still running above target, even as consumer spending softened.

Trump has repeatedly tried different tactics to remove Powell—but so far, nothing has stuck:

• He has floated firing Powell, citing policy disagreements and frustration over rate decisions, even saying “Powell’s termination … cannot come fast enough,” though legal experts confirm the president can only remove the Fed chair “for cause” like fraud or malfeasance.

• In late July, Trump visited the Fed headquarters to publicly criticize the building’s renovation budget—claiming it exceeded $3.1 billion—and suggesting the project could justify Powell’s dismissal. But Powell defended the funding needs for structural safety, historic preservation, and hazard remediation.

However, Trump is gaining allies at the Federal Reserve. By the July vote, two Trump-appointed governors—Michelle Bowman and Christopher Waller—dissented in favor of a rate cut. It was the first time two governors have dissented in over 30 years, but Powell retained control with support from the rest of the Board and regional Fed presidents.

The takeaway: the Fed still sees its job as unfinished. Until inflation gets closer to the 2% target, Powell made clear that cuts would be data-dependent—not headline-driven. Powell has consistently maintained composure in the face of persistent public attacks—but how long can it last? The market certainly expects a September cut (at least that's how the 10-year Treasury and mortgage rates see things).

How Do Mortgage Rates Fall Without a Fed Rate Cut?

Mortgage rates often move independently of the Fed’s actual rate decisions. That’s because they respond to what the market believes is coming next—not what the Fed does today.

Key drivers of mortgage rate movement include:

• Inflation expectations – If inflation is expected to fall, mortgage rates usually follow.

• Economic growth projections – Slower growth can push investors toward safer assets, lowering yields.

• Global investor demand for Treasuries – Foreign capital flowing into U.S. bonds increases demand, lowering Treasury yields and mortgage rates.

• Fed balance sheet activity – When the Fed buys or sells mortgage-backed securities, it directly affects mortgage rate pricing.

• Fiscal policy – Government spending, tax cuts, and deficits shape market expectations and inflation outlooks.

The Fed influences these factors, but doesn’t control them. That’s why you might see mortgage rates fall in anticipation of future cuts—or rise after a rate cut if investors think it’s the last one for a while. The bond market is always trying to stay one step ahead.

What This Means for Buyers in 2025

Buyers shouldn’t assume that a Fed rate cut will lower their mortgage rate. Timing the market based on Fed meetings is a gamble. Instead, they should focus on what they can control:

• Improving credit scores – A higher credit score can unlock lower mortgage rates by reducing perceived lending risk.

• Reducing debt – Lower debt-to-income ratios can increase borrowing power and improve loan approval odds and potentially your rate.

• Comparing multiple mortgage quotes – Shopping around can save thousands over the life of your loan; rates and fees vary widely between lenders.

• Working with brokers who understand rate dynamics—like LendFriend – A broker like LendFriend can help you navigate market trends and match you with competitive loan options that fit your situation.

Whether rates drop this fall or not, your best move is to be financially prepared and strategically flexible. LendFriend can help you stay ahead of the curve with expert guidance tailored to shifting market conditions.