Why doesn't the Fed rate reduction lower interest rates?

Lesley Palmiter Real Estate

Published by Lesley Palmiter

People often ask, “if the Fed just lowered the interest rate, why aren’t mortgage rates dropping too?” The following is what the Federal Reserve does. (Attribution to Bankrate with this writer’s marketplace observations.)

The U.S. Federal Reserve sets borrowing costs for short-term loans by changing its federal funds (prime) rate. This dictates how much banks pay each other in interest to borrow funds from reserves, kept at the Fed on an overnight basis.

In 2022 - 2023, the Fed increased this key interest rate to help calm inflation — hikes that made it more costly for Americans to borrow money or take out credit. This appeared to have the right effect, as throughout late 2023 and 2024, inflation softened.

Fixed-rate mortgages — the most popular type of home loan — don’t mirror the federal funds rate, they track the 10-year Treasury yield. The fed funds rate affects short-term loans, such as credit card rates and the rates on new home equity loans and lines of credit.

The Fed also buys and sells debt securities in the financial marketplace. This helps support the flow of credit, which tends to have an overarching impact on mortgage rates.

This broker, agent, and analyst, predicts that certain “hot spots” of population exit migration throughout the country, the Boston area among them, will cause a significant bump in available inventory, beginning in spring of 2025.

Available inventory will affect pricing, but not necessarily interest rates right away. Those in the lending industry project these rates to remain between 6 - 7% throughout 2025.

Should you have questions or would like help selling or buying, contact me at 617-275-6240 or Lesley@lesleypalmiter.pro. Because you need a pro!