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How the Fed does—and doesn't—influence mortgage rates
| Month | Average 30-Year Mortgage Rate | Federal Fund Rate |
|---|---|---|
| 10/1/2024 | 6.4% | 4.8% |
| 9/1/2024 | 6.2% | 5.1% |
| 8/1/2024 | 6.5% | 5.3% |
| 7/1/2024 | 6.8% | 5.3% |
| 6/1/2024 | 6.9% | 5.3% |
| 5/1/2024 | 7.1% | 5.3% |
| 4/1/2024 | 7.0% | 5.3% |
| 3/1/2024 | 6.8% | 5.3% |
| 2/1/2024 | 6.8% | 5.3% |
| 1/1/2024 | 6.6% | 5.3% |
| 12/1/2023 | 6.8% | 5.3% |
| 11/1/2023 | 7.4% | 5.3% |
| 10/1/2023 | 7.6% | 5.3% |
| 9/1/2023 | 7.2% | 5.3% |
| 8/1/2023 | 7.1% | 5.3% |
| 7/1/2023 | 6.8% | 5.1% |
| 6/1/2023 | 6.7% | 5.1% |
| 5/1/2023 | 6.4% | 5.1% |
| 4/1/2023 | 6.3% | 4.8% |
| 3/1/2023 | 6.5% | 4.7% |
| 2/1/2023 | 6.3% | 4.6% |
| 1/1/2023 | 6.3% | 4.3% |
| 12/1/2022 | 6.4% | 4.1% |
| 11/1/2022 | 6.8% | 3.8% |
| 10/1/2022 | 6.9% | 3.1% |
| 9/1/2022 | 6.1% | 2.6% |
| 8/1/2022 | 5.2% | 2.3% |
| 7/1/2022 | 5.4% | 1.7% |
| 6/1/2022 | 5.5% | 1.2% |
| 5/1/2022 | 5.2% | 0.8% |
| 4/1/2022 | 5.0% | 0.3% |
| 3/1/2022 | 4.2% | 0.2% |
| 2/1/2022 | 3.8% | 0.1% |
| 1/1/2022 | 3.4% | 0.1% |
| 12/1/2021 | 3.1% | 0.1% |
| 11/1/2021 | 3.1% | 0.1% |
| 10/1/2021 | 3.1% | 0.1% |
| 9/1/2021 | 2.9% | 0.1% |
| 8/1/2021 | 2.8% | 0.1% |
| 7/1/2021 | 2.9% | 0.1% |
| 6/1/2021 | 3.0% | 0.1% |
| 5/1/2021 | 3.0% | 0.1% |
| 4/1/2021 | 3.1% | 0.1% |
| 3/1/2021 | 3.1% | 0.1% |
| 2/1/2021 | 2.8% | 0.1% |
| 1/1/2021 | 2.7% | 0.1% |
| 12/1/2020 | 2.7% | 0.1% |
| 11/1/2020 | 2.8% | 0.1% |
| 10/1/2020 | 2.8% | 0.1% |
| 9/1/2020 | 2.9% | 0.1% |
| 8/1/2020 | 2.9% | 0.1% |
| 7/1/2020 | 3.0% | 0.1% |
| 6/1/2020 | 3.2% | 0.1% |
| 5/1/2020 | 3.2% | 0.1% |
| 4/1/2020 | 3.3% | 0.1% |
| 3/1/2020 | 3.5% | 0.7% |
| 2/1/2020 | 3.5% | 1.6% |
| 1/1/2020 | 3.6% | 1.6% |
| 12/1/2019 | 3.7% | 1.6% |
| 11/1/2019 | 3.7% | 1.6% |
| 10/1/2019 | 3.7% | 1.8% |
| 9/1/2019 | 3.6% | 2.0% |
| 8/1/2019 | 3.6% | 2.1% |
| 7/1/2019 | 3.8% | 2.4% |
| 6/1/2019 | 3.8% | 2.4% |
| 5/1/2019 | 4.1% | 2.4% |
| 4/1/2019 | 4.1% | 2.4% |
| 3/1/2019 | 4.3% | 2.4% |
| 2/1/2019 | 4.4% | 2.4% |
| 1/1/2019 | 4.5% | 2.4% |
| 12/1/2018 | 4.6% | 2.3% |
| 11/1/2018 | 4.9% | 2.2% |
| 10/1/2018 | 4.8% | 2.2% |
| 9/1/2018 | 4.6% | 1.9% |
| 8/1/2018 | 4.5% | 1.9% |
| 7/1/2018 | 4.5% | 1.9% |
| 6/1/2018 | 4.6% | 1.8% |
| 5/1/2018 | 4.6% | 1.7% |
| 4/1/2018 | 4.5% | 1.7% |
| 3/1/2018 | 4.4% | 1.5% |
| 2/1/2018 | 4.3% | 1.4% |
| 1/1/2018 | 4.0% | 1.4% |
| 12/1/2017 | 4.0% | 1.3% |
| 11/1/2017 | 3.9% | 1.2% |
| 10/1/2017 | 3.9% | 1.1% |
| 9/1/2017 | 3.8% | 1.1% |
| 8/1/2017 | 3.9% | 1.2% |
| 7/1/2017 | 4.0% | 1.1% |
| 6/1/2017 | 3.9% | 1.0% |
| 5/1/2017 | 4.0% | 0.9% |
| 4/1/2017 | 4.0% | 0.9% |
| 3/1/2017 | 4.2% | 0.8% |
| 2/1/2017 | 4.2% | 0.7% |
| 1/1/2017 | 4.2% | 0.7% |
| 12/1/2016 | 4.2% | 0.5% |
| 11/1/2016 | 3.8% | 0.4% |
| 10/1/2016 | 3.5% | 0.4% |
| 9/1/2016 | 3.5% | 0.4% |
| 8/1/2016 | 3.4% | 0.4% |
| 7/1/2016 | 3.4% | 0.4% |
| 6/1/2016 | 3.6% | 0.4% |
| 5/1/2016 | 3.6% | 0.4% |
| 4/1/2016 | 3.6% | 0.4% |
| 3/1/2016 | 3.7% | 0.4% |
| 2/1/2016 | 3.7% | 0.4% |
| 1/1/2016 | 3.9% | 0.3% |
| 12/1/2015 | 4.0% | 0.2% |
| 11/1/2015 | 3.9% | 0.1% |
| 10/1/2015 | 3.8% | 0.1% |
| 9/1/2015 | 3.9% | 0.1% |
| 8/1/2015 | 3.9% | 0.1% |
| 7/1/2015 | 4.0% | 0.1% |
| 6/1/2015 | 4.0% | 0.1% |
| 5/1/2015 | 3.8% | 0.1% |
| 4/1/2015 | 3.7% | 0.1% |
| 3/1/2015 | 3.8% | 0.1% |
| 2/1/2015 | 3.7% | 0.1% |
| 1/1/2015 | 3.7% | 0.1% |
| 12/1/2014 | 3.9% | 0.1% |
| 11/1/2014 | 4.0% | 0.1% |
| 10/1/2014 | 4.0% | 0.1% |
| 9/1/2014 | 4.2% | 0.1% |
| 8/1/2014 | 4.1% | 0.1% |
| 7/1/2014 | 4.1% | 0.1% |
| 6/1/2014 | 4.2% | 0.1% |
| 5/1/2014 | 4.2% | 0.1% |
| 4/1/2014 | 4.3% | 0.1% |
| 3/1/2014 | 4.3% | 0.1% |
| 2/1/2014 | 4.3% | 0.1% |
| 1/1/2014 | 4.4% | 0.1% |
| 12/1/2013 | 4.5% | 0.1% |
| 11/1/2013 | 4.3% | 0.1% |
| 10/1/2013 | 4.2% | 0.1% |
| 9/1/2013 | 4.5% | 0.1% |
| 8/1/2013 | 4.5% | 0.1% |
| 7/1/2013 | 4.4% | 0.1% |
| 6/1/2013 | 4.1% | 0.1% |
| 5/1/2013 | 3.5% | 0.1% |
| 4/1/2013 | 3.4% | 0.1% |
| 3/1/2013 | 3.6% | 0.1% |
| 2/1/2013 | 3.5% | 0.1% |
| 1/1/2013 | 3.4% | 0.1% |
| 12/1/2012 | 3.3% | 0.2% |
| 11/1/2012 | 3.4% | 0.2% |
| 10/1/2012 | 3.4% | 0.2% |
| 9/1/2012 | 3.5% | 0.1% |
| 8/1/2012 | 3.6% | 0.1% |
| 7/1/2012 | 3.5% | 0.2% |
| 6/1/2012 | 3.7% | 0.2% |
| 5/1/2012 | 3.8% | 0.2% |
| 4/1/2012 | 3.9% | 0.1% |
| 3/1/2012 | 4.0% | 0.1% |
| 2/1/2012 | 3.9% | 0.1% |
| 1/1/2012 | 3.9% | 0.1% |
| 12/1/2011 | 4.0% | 0.1% |
| 11/1/2011 | 4.0% | 0.1% |
| 10/1/2011 | 4.1% | 0.1% |
| 9/1/2011 | 4.1% | 0.1% |
| 8/1/2011 | 4.3% | 0.1% |
| 7/1/2011 | 4.5% | 0.1% |
| 6/1/2011 | 4.5% | 0.1% |
| 5/1/2011 | 4.6% | 0.1% |
| 4/1/2011 | 4.8% | 0.1% |
| 3/1/2011 | 4.8% | 0.1% |
| 2/1/2011 | 5.0% | 0.2% |
| 1/1/2011 | 4.8% | 0.2% |
| 12/1/2010 | 4.7% | 0.2% |
| 11/1/2010 | 4.3% | 0.2% |
| 10/1/2010 | 4.2% | 0.2% |
| 9/1/2010 | 4.3% | 0.2% |
| 8/1/2010 | 4.4% | 0.2% |
| 7/1/2010 | 4.6% | 0.2% |
| 6/1/2010 | 4.7% | 0.2% |
| 5/1/2010 | 4.9% | 0.2% |
| 4/1/2010 | 5.1% | 0.2% |
| 3/1/2010 | 5.0% | 0.2% |
| 2/1/2010 | 5.0% | 0.1% |
| 1/1/2010 | 5.0% | 0.1% |
| 12/1/2009 | 4.9% | 0.1% |
| 11/1/2009 | 4.9% | 0.1% |
| 10/1/2009 | 5.0% | 0.1% |
| 9/1/2009 | 5.1% | 0.1% |
| 8/1/2009 | 5.2% | 0.2% |
| 7/1/2009 | 5.2% | 0.2% |
| 6/1/2009 | 5.4% | 0.2% |
| 5/1/2009 | 4.9% | 0.2% |
| 4/1/2009 | 4.8% | 0.1% |
| 3/1/2009 | 5.0% | 0.2% |
| 2/1/2009 | 5.1% | 0.2% |
| 1/1/2009 | 5.0% | 0.1% |
| 12/1/2008 | 5.3% | 0.2% |
| 11/1/2008 | 6.1% | 0.4% |
| 10/1/2008 | 6.2% | 1.0% |
| 9/1/2008 | 6.0% | 1.8% |
| 8/1/2008 | 6.5% | 2.0% |
| 7/1/2008 | 6.4% | 2.0% |
| 6/1/2008 | 6.3% | 2.0% |
| 5/1/2008 | 6.0% | 2.0% |
| 4/1/2008 | 5.9% | 2.3% |
| 3/1/2008 | 6.0% | 2.6% |
| 2/1/2008 | 5.9% | 3.0% |
| 1/1/2008 | 5.8% | 3.9% |
| 12/1/2007 | 6.1% | 4.2% |
| 11/1/2007 | 6.2% | 4.5% |
| 10/1/2007 | 6.4% | 4.8% |
| 9/1/2007 | 6.4% | 4.9% |
| 8/1/2007 | 6.6% | 5.0% |
| 7/1/2007 | 6.7% | 5.3% |
| 6/1/2007 | 6.7% | 5.3% |
| 5/1/2007 | 6.3% | 5.3% |
| 4/1/2007 | 6.2% | 5.3% |
| 3/1/2007 | 6.2% | 5.3% |
| 2/1/2007 | 6.3% | 5.3% |
| 1/1/2007 | 6.2% | 5.3% |
| 12/1/2006 | 6.1% | 5.2% |
| 11/1/2006 | 6.2% | 5.3% |
| 10/1/2006 | 6.4% | 5.3% |
| 9/1/2006 | 6.4% | 5.3% |
| 8/1/2006 | 6.5% | 5.3% |
| 7/1/2006 | 6.8% | 5.2% |
| 6/1/2006 | 6.7% | 5.0% |
| 5/1/2006 | 6.6% | 4.9% |
| 4/1/2006 | 6.5% | 4.8% |
| 3/1/2006 | 6.3% | 4.6% |
| 2/1/2006 | 6.3% | 4.5% |
| 1/1/2006 | 6.1% | 4.3% |
| 12/1/2005 | 6.3% | 4.2% |
| 11/1/2005 | 6.3% | 4.0% |
| 10/1/2005 | 6.1% | 3.8% |
| 9/1/2005 | 5.8% | 3.6% |
| 8/1/2005 | 5.8% | 3.5% |
| 7/1/2005 | 5.7% | 3.3% |
| 6/1/2005 | 5.6% | 3.0% |
| 5/1/2005 | 5.7% | 3.0% |
| 4/1/2005 | 5.9% | 2.8% |
| 3/1/2005 | 5.9% | 2.6% |
| 2/1/2005 | 5.6% | 2.5% |
| 1/1/2005 | 5.7% | 2.3% |
| 12/1/2004 | 5.8% | 2.2% |
| 11/1/2004 | 5.7% | 1.9% |
| 10/1/2004 | 5.7% | 1.8% |
| 9/1/2004 | 5.8% | 1.6% |
| 8/1/2004 | 5.9% | 1.4% |
| 7/1/2004 | 6.1% | 1.3% |
| 6/1/2004 | 6.3% | 1.0% |
| 5/1/2004 | 6.3% | 1.0% |
| 4/1/2004 | 5.8% | 1.0% |
| 3/1/2004 | 5.4% | 1.0% |
| 2/1/2004 | 5.6% | 1.0% |
| 1/1/2004 | 5.7% | 1.0% |
As the graph shows, there’s a clear correlation between the federal funds rate and the average 30-year mortgage rate.Footnote1,2 Typically, when the Federal Reserve raises or lowers the federal funds rate, mortgage rates tend to move in the same direction. But, as we saw in September 2024, the federal funds rate dropped by 50 basis points and yet mortgage rates went up. So, why do the two figures sometimes run parallel and sometimes head in opposite directions? It’s because the link between the federal funds rate and mortgage rates isn’t one of cause and effect, and neither figure exists in a vacuum.
Let’s examine the subtleties of the relationship between the two.
The missing link: The yield on the 10-year Treasury note
The Federal Reserve sets the federal funds rate. And while the federal funds rate does have a downstream effect on mortgage rates, it has a much more direct influence on the 10-year Treasury bond yield.Footnote3 When the Fed raises the federal funds rate, the 10-year Treasury bond yield typically rises along with it.
The 10-year Treasury bond yield is the interest rate at which the government pays to borrow money for a decade. It serves as a benchmark for various corporate and consumer interest rates, including mortgage rates.Footnote4 The 10-year Treasury bond yield is seen as an indicator of investor sentiment regarding the economy as a whole. When the yield rises, that means demand for Treasury bonds is falling because investors are confident in the economy and are pursuing higher-risk, higher-reward investments. When the yield falls, demand for Treasury bonds is rising as investors have less confidence in the current strength of the economy.
So, when the 10-year Treasury bond yield goes up, this will often filter down to mortgage rates, which will go up accordingly.
But not always.
Other mitigating factors
As the introduction to this article mentioned, in September 2024, the Fed dropped the federal funds rate by 50 basis points, which also lowered the yield on the 10-year Treasury bond. But in this instance, mortgage rates didn’t follow suit, they actually went up. So, why is that?
There are a variety of reasons, and it’s not possible to point to any one or two reasons as the cause. But it’s helpful to know the various mitigating factors that may be at play.
One reason is that the market may have already priced in the Fed’s rate cut. Mortgage rate changes are often anticipatory, and when the Fed has promised to, or seems likely to, make a big cut, mortgage rates will often drop before the Fed meets to make that decision.Footnote5
Another possible reason is time of year. Much like how gas prices usually peak in the summer months and drop in the winter, mortgage rates seem to peak each October before dropping down in December — at least that has been the trend since 2020.Footnote6
Yet another possible mitigating factor is the overall state of the economy at that moment. In the September 2024 instance, there was some market volatility due to the uncertainty of the result of the upcoming presidential election as well as a much healthier jobs report from the Bureau of Labor Statistics than had been expected.
All of these are short-term variances, and, as the graph at the top shows, eventually things tend to even out, and mortgage rates rise and fall with the federal funds rate.
So, how does the future look?
The outlook for 2025
All the major prognosticators expect a similar trajectory for mortgage rates in 2025 — a slow, gradual drop. Both Fannie Mae (Federal National Mortgage Association) and NAR (National Association of Realtors) predict that mortgage rates will reach an average of 6% in Q1 of 2025, 5.9% in Q2, 5.8% in Q3, and Fannie Mae predicts 5.7% in Q4, while NAR sticks with 5.8% for that final quarter.Footnote7
Reaching historic sub-4% rates again is virtually impossible without an economic crisis, but the drop to below 6% will allow some buyers who were previously priced out to enter the market.
What homebuyers can be proactive about
Obviously, the market is beyond a homebuyer’s control. But there are a few things a potential homebuyer can do to try to ensure they get a lower mortgage rate.
One factor a homebuyer has control over is their credit score. The higher their credit score, the lower their mortgage rate. Paying down debt to decrease the debt-to-income ratio is one way to raise the score.
Another factor a homebuyer has a say in is which lender they go with. Comparing mortgage lenders and finding the best rate can make a significant difference.
The last tactic available to potential homebuyers is choosing an adjustable-rate mortgage, or ARM, if the situation warrants it. ARMs typically offer lower rates than fixed-rate mortgages in the early years of the loan. It’s common for an ARM to have a lower fixed rate for the first five years of the mortgage before switching to an adjustable rate, so for homebuyers who intend to move in fewer than five years, or who hope to refinance in that timeframe, the savings in the first five years of an ARM can be worth it.
No one can predict the future. In the short term, rates will dip and spike. But, in the long run, it’s likely the prediction of a slow and steady drop in mortgage rates will play out in 2025. Potential homebuyers shouldn’t try to time the market; it’s wiser to buy a home when you’re ready and you find the right home at the right price — refinancing later is always an option. And existing homeowners should keep an eye on mortgage rates and wait for a rate they’re comfortable with before considering refinancing.
1 FRED, Federal Reserve Bank of St. Louis, Federal Fund Effective Rate. Accessed November 2024.
2 FRED, Federal Reserve Bank of St. Louis, 30-Year Fixed Rate Mortgage Average in the United States. Accessed November 2024.
3 “How the Federal Reserve rate decision affects mortgage rates.” Written by E Napoletano. Updated November 7, 2024. Accessed November 2024.
4 “10-Year Treasury Bond Yield: What It Is and Why It Matters.” Written by Kristina Zucchi. Updated June 19, 2024. Accessed November 2024.
5 “3 Reasons Mortgage Rates Don’t Always Fall When The Fed Cuts Rates.” Written by Jay Voorhees. Published August 20, 2024. Accessed November 2024.
6 “Don’t Worry – Rates Peak EVERY October; 8% Last October Before Falling to 6.6% By December; 2022 Was Similar.” Written by Jay Voorhees. Published October 21, 2024. Accessed November 2024.
7 “Experts Predict Where Mortgage Rates Are Headed in 2025 as the Fed Cuts Rates.” Writen by Lance Lambert. Published September 20, 2024. Accessed November 2024.
MAP7415591 | 12/2024