Hoping for a better mortgage after the Fed cut interest rates? Don't hold your breath

When the Federal Reserve cut interest rates this week, some might have hoped that mortgage rates would follow. But contrary to popular belief, mortgage rates track movements in the long-term 10-year Treasury yield, rather than the federal funds rate.

The central bank’s third-straight cut of 2025 lowered the target range for the federal funds rate to 3.5%-3.75%. The Fed's decision was driven mostly by a weakening jobs market. But the Fed also made it clear that further rate cuts are on pause, projecting only one quarter-percentage-point cut in 2026 as it works to tamp down inflation and maximize employment.

According to Mortgage News Daily, the national average 30-year fixed rate fell to 6.3% Wednesday after the Fed cut rates, down from 6.35% on Tuesday. The 30-year rate fell further Thursday, to 6.26%. But current mortgage rates are actually up from 6.13% in late October, despite the Fed cutting rates then, too.

Fed Chair Jerome Powell has faced months of intense criticism and pressure from President Donald Trump and his allies for not slashing borrowing costs more aggressively. They argue rate cuts are needed to stimulate the economy.

But the Trump the administration's trade war and steep tariffs are forecasted to slow economic growth and keep inflation elevated, according to an analysis by the Tax Foundation. Additionally, tariffs are hitting consumers, amounting to a per-household average tax increase of $1,100 in 2025 and $1,400 in 2026, the Tax Foundation said.

Experts also warn that lowering the federal funds rate is a Catch-22.

"Obviously, there's people rooting on lower rates, but to get the lower rates, unfortunately, right now, you need the negative economic data,” said Colin Robertson, a former loan officer and founder of The Truth About Mortgage blog. “You want the 5% mortgage rate, but do you want what comes with it? Do you want higher unemployment, job losses, people not being able to get hired?"

Lower rates might make monthly payments more affordable. But economic uncertainty could make people hesitant to make such a large financial commitment if they’re worried about job losses or an economic downturn.

What actually moves mortgage rates

The Fed controls short-term interest rates, impacting rates for credit cards, auto loans, savings accounts, home equity lines of credit (HELOCs) and adjustable-rate mortgages (ARMs).

Meanwhile, mortgages are long-term loans typically spanning 15 to 30 years. This means mortgage rates respond to different economic factors, such as the jobs market, inflation, and geopolitical events, as well as lender capacity and borrower demand.

When the Fed meets, policymakers review the same economic data that markets have been analyzing for weeks. There's rarely a surprise. And while the Fed’s decisions can have an indirect impact on mortgage rates, they aren’t the main driver like many people believe.

For consumers trying to time their home purchase or refinance, the key is understanding which economic indicators move rates the most.

The jobs market

Robertson emphasized that employment data is the top metric to watch, pointing to the delayed November jobs report scheduled for release next week.

As of September (the latest month for which Bureau of Labor Statistics data is available), the U.S. unemployment rate reached 4.4%, with 7.6 million Americans out of work, up from a rate of 4.1% and 6.9 million unemployed the same period a year ago, BLS data show.

Outside data points to even more troubling numbers. Through November, employers have slashed more than 1.17 million jobs this year, up 54% from the 761,358 jobs cuts seen in the first 11 months of 2024, according to a report from Challenger, Gray & Christmas, a global outplacement and executive coaching firm.

The cuts are at the highest level seen in five years since the COVID-19 pandemic, when more than 2.2 million job losses were recorded over the same period, the firm reported.

Inflation

Mortgage rates also depend on inflation, as measured by the Consumer Price Index (CPI). Over the past two years, inflation has stayed stubbornly higher than the Fed’s 2% target, helping keeping mortgage rates higher.

While that pressure has somewhat moderated, shifting focus to the labor market, the continued affordability challenges consumers face from every day goods to cost of living

"If the economy is slowing because there's higher unemployment, there's fewer hirings [...] you get a slower economy, you can reduce rates to stimulate the economy," Robertson explained.

What to expect in 2026

Powell indicated that further cuts would require warning signs in upcoming economic data, and he emphasized that monetary policy operates with long lags, meaning it may take several months to fully assess the effects of earlier rate cuts.

The Fed also signaled caution about future cuts, saying it would carefully evaluate incoming data "in considering the extent and timing of additional adjustments to the target range for the federal funds rate."

For 2026, industry forecasts 30-year fixed mortgage rates staying just above 6% as home prices continue to moderate in many housing markets, giving some buyers a window of opportunity, according to a new report from Redfin. 

“Sales will increase only slightly because affordability will improve just enough to lure some on-the-fence buyers,” according to Redfin. However, the caveat is many potential buyers will still be priced out of the market or afraid to act at all due to a shaky jobs picture, “including some Americans who have lost their job — or fear losing their job — as AI takes a toll on the white-collar workforce,” Redfin added.

Despite the lack of dramatic rate drops on the horizon, there's reason for cautious optimism.

“Still, even without drastic declines in borrowing costs, 2026 is a year for small wins,” said Kara Ng, senior economist with Zillow Home Loans. “Affordability is set to gradually improve as modest rises in home values means that incomes can catch up, opening up a wider pool of shoppers able to buy a home.”

If you’re in the market to buy a home (or refinance), focus on the bigger picture rather than trying to time the market perfectly, experts suggest.

"Focus less on the Fed, more on the economic data," Robertson said. "Look at the 10-year yield, instead of looking at what Jerome Powell and the Fed are saying."