If you’ve paid attention to the mortgage world for a while, you’ve probably noticed that certain events seem to trigger changes in mortgage rates. One of those events is when the Fed meets to determine what to do with interest rates: cut them, leave them unchanged, or increase (hike) them.
What the Fed does with its benchmark rate often corresponds to a similar outcome for mortgage rates (e.g. a Fed rate hike leading to higher mortgage rates), but not always.
WHAT IS THE FED AND WHAT DOES IT DO?
The Federal Reserve (the Fed) serves as the central bank of the U.S. and is responsible for monetary policy. The Federal Open Market Committee (FOMC) is the key decision-making body responsible for setting monetary policy. The FOMC consists of twelve members and meets eight times per year.
The Fed has a “dual mandate” focused on maximum employment and stable prices. One of its primary tools for pursuing that mandate is adjusting the federal funds rate, which is the rate banks charge one another for overnight lending.
Changes to the federal funds rate have a direct impact on short-term borrowing costs, such as credit cards and HELOCs. Its impact can also be felt in longer-term debt, such as 30-year mortgages, but the relationship is less direct. Mortgage rates may go up or down depending on many other factors.
What do I mean by that? Here’s an example.
In September 2026, the Fed increased its benchmark rate by 0.25 percentage points. You might expect mortgage rates to rise in response.
Instead, the average 30-year mortgage rate actually decreased by 10 basis points immediately following the Fed’s announcement, according to MBS Live.
So what happened?
THE FED DOESN’T SET MORTGAGE RATES
The Fed does not directly set mortgage rates.
Mortgage rates are primarily influenced by the bond market, including the pricing and yields of mortgage-backed securities (MBS), along with factors such as Treasury yields, inflation expectations, and investor demand. Mortgage loans are ultimately packaged and sold into the secondary market, where investors buy and sell mortgage-backed securities.
Historically, 30-year fixed mortgage rates have closely tracked the 10-year U.S. Treasury yield. For DSCR investor mortgages, these rates tend to follow the 5-year US Treasury (because the average length of time a mortgage is held for an investor-owned home versus an owner-occupied home is less).
So if the Fed doesn’t directly set mortgage rates, why do Fed announcements seem to affect them?
Expectations.
Financial markets don’t wait for the Fed to make an announcement before reacting. Investors are constantly making bets about where interest rates, inflation, and the economy are headed.
If a Fed rate hike or cut is widely expected, much of that expectation may already be reflected in bond prices and mortgage rates before the Fed actually makes its announcement.
That means the market may have already “priced in” the expected Fed decision.
And sometimes, what happens after the announcement can be surprising.
If the Fed does exactly what investors expected, there may be relatively little movement in mortgage rates. If the Fed’s decision or its outlook for future rate changes surprises investors, however, bond markets can react—and mortgage rates can move in either direction.
FINAL TAKEAWAY
The relationship between the Fed and mortgage rates is real, but it isn’t as simple as:
Fed raises rates → mortgage rates go up
or
Fed cuts rates → mortgage rates go down.
The bond market is forward-looking. Mortgage rates can move before a Fed announcement, react to what the Fed says about the future, or even move in the opposite direction of the Fed’s latest rate decision.
That’s why a Fed rate hike doesn’t necessarily mean mortgage rates will go up, and a Fed rate cut doesn’t necessarily mean mortgage rates will go down.
For real estate investors, the takeaway is simple: don’t assume that the latest Fed announcement tells you exactly where mortgage rates are headed next.
Thanks for reading this week’s Experience, and best of luck in your real estate investing journey!
-BROCK