It happened!
On September 17, the Federal Reserve cut its benchmark interest rate by 25 basis points. Officials also signaled the possibility of two more rate cuts this year.
Mortgage rates had already been falling, anticipating the Fed's widely expected move. Just before the annoucement, the average interest rate on a 30-year fixed mortgage stood at 6.35%, the lowest in nearly a year. By the end of September, a 30-year fixed mortgage was roughly 6.125% to 6.38%, depending on lender and region.
Now that it's official, how will the Fed's cut impact mortgage rates? It's a question we get all the time.
A quarter-point reduction in the Federal Reserve's interest rate, while seemingly small, can have a noticeable impact on U.S. mortgage rates, particularly for potential home buyers. It's important to understand that the Federal Funds Rate, which the Fed directly controls, isn't the same as mortgage rates. However, they are intrinsically linked.
The Fed's Role and Its Indirect Influence
The Federal Reserve primarily influences short-term interest rates through the Federal Funds Rate, which is the target rate for overnight lending between banks. When the Fed reduces this rate, it signals an easing of monetary policy, typically done to stimulate economic growth. This reduction makes it cheaper for banks to borrow from each other, and this lower cost of funds can trickle down to consumers.
Mortgage rates, particularly for fixed-rate mortgages, are more closely tied to the yield on U.S.
Treasury bonds, especially the 10-year Treasury note. Treasury yields are influenced by various factors, including inflation expectations, economic growth forecasts, and, crucially, the Federal Reserve's monetary policy.
How a .25 Basis Point Cut Plays Out
When the Fed cuts rates by 0.25 basis points (which is 0.25%), it generally leads to a decrease in the yield on Treasury bonds. This is because investors anticipate lower inflation and slower economic growth, making the fixed income of Treasuries relatively more attractive. As Treasury yields fall, so too do mortgage rates.
However, the impact isn't always a direct 1:1 correlation. Several factors can moderate or amplify the effect:
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