Why has the federal reserve reduced interest rates, but mortgage rates continue to rise?

The Federal Reserve and mortgage rates are related, but they don't move in lockstep because they are influenced by different factors. Here’s a simple way to explain it:

1. The Fed controls short-term rates: The Federal Reserve sets the federal funds rate, which is the interest rate banks charge each other for overnight loans. Lowering this rate makes borrowing cheaper for things like car loans or credit cards, and it’s meant to stimulate the economy.

   
   

2. Mortgage rates depend on long-term factors: Mortgage rates are influenced by longer-term factors, such as:

   
   

   • Inflation expectations: If inflation is expected to rise, lenders increase mortgage rates to make up for the declining purchasing power of money over time.

   • The bond market: Mortgage rates are closely tied to the yield on 10-year Treasury bonds. When investors expect the economy to slow down or face uncertainty, they often buy Treasury bonds, which lowers their yields and can indirectly lower mortgage rates. Conversely, if investors expect stronger growth or higher inflation, bond yields and mortgage rates may rise.

     
     

3. Current situation: Recently, even though the Fed has reduced its rates, mortgage rates have been rising because of factors like:

   
   

   • Inflation concerns: Persistent inflation can push mortgage rates higher.

   • Economic uncertainty: The bond market and investors' expectations about the future economy are causing volatility in mortgage rates.

   • Risk premiums: Lenders might be adding a cushion to mortgage rates due to uncertainty about economic conditions or potential defaults.

     
     

To sum up: The Fed cutting rates is like adjusting the thermostat to make the house warmer, but if there’s a cold draft (inflation or economic worries), you might not feel the warmth right away. Mortgage rates are more about that draft and how long it might last.