Rates Usually Don’t Fall When The Fed Cuts – Why It Matters!

Why Waiting for a Fed Rate Cut Could Cost You: 3 Reasons Mortgage Rates Don’t Always Drop

A few weeks ago, Fed Chair Jerome Powell gave a clear signal that the Federal Reserve was planning to cut interest rates at its upcoming meeting today. The markets didn’t wait around — they immediately reacted. Mortgage rates dropped, and we saw a wave of both refinance and purchase clients eager to lock in those lower rates.

I’m sharing this now because we still hear the same phrase over and over:
“I’m going to wait to lock my rate until after the Fed cuts.”

We heard this last year too and we explained to our clients that by the time the Fed actually cuts, the market has often already priced it in. Thankfully, many of our clients listened — and locked in while rates were low. We had many acquaintances, though, at other lenders who were not able to convince their clients to act, and ALL of those clients missed out.

This is why understanding how mortgage rates actually move is so important. If borrowers don’t grasp the timing mismatch between the Fed and the broader bond market, they may unintentionally miss their best opportunity.

Let’s break it down.

3 Reasons Mortgage Rates Don’t Always Drop When the Fed Cuts Rates

1. Markets React Before the Fed Does

The Fed usually signals its intentions well ahead of time. Whether it’s public comments, economic projections, or leaks through financial journalists, investors typically know what’s coming. When markets expect a rate cut, they price it in early — meaning rates can fall days or weeks before the Fed takes action.

So when the Fed finally announces the move? The market often shrugs — or sometimes even does the opposite of what people expect. That’s what we saw in fall 2024, when rates actually rose after the Fed cut.
Analyst Jim Bianco has even predicted this pattern could repeat itself.

2. The Fed Doesn’t Directly Control Mortgage Rates

The Fed sets the short-term Fed Funds Rate — the rate banks charge each other for overnight loans. Mortgage rates, however, are long-term rates. They’re influenced by a broader mix of factors, and while the Fed can steer sentiment, it doesn’t directly control mortgage pricing.

Case in point: for much of 2024, mortgage rates dropped nearly a full percentage point even though the Fed hadn’t moved its policy rate at all.

3. Inflation and Growth Expectations Matter More

Bond traders — who ultimately shape long-term interest rates — are focused on the future: inflation forecasts, economic growth, job reports, GDP, consumer spending, and more. If inflation pressures persist, or if the economy is showing signs of strength, investors may demand higher returns on bonds. That pushes mortgage rates up, even in a rate-cutting environment.

Bottom Line: Don’t Wait for the Headlines

If you’re in the market to buy or refinance, betting on the idea that “mortgage rates will drop after the Fed cuts” is a risky strategy. Often, the opposite happens. The best time to act is when the opportunity is in front of you — not when the news finally catches up.

Want help figuring out whether now’s the right time to lock your rate? Let’s talk.