This week’s labor market data and the Fed’s speeches have made it pretty clear: the Fed is likely to cut rates by at least 0.25% in two weeks. Naturally, with all the buzz, consumers are getting excited about the prospect of lower mortgage rates. Who wouldn’t want a better deal? But here’s the kicker—most people are surprised when they find out that the only rate that’s guaranteed to drop on Fed day is the Fed Funds Rate.
And no, it’s not that mortgage rates are slow to react. In fact, the opposite is true. The Fed Funds Rate is actually playing catch-up with the rest of the market! Mortgage rates have already dropped in anticipation of the upcoming cut. Just look at the numbers: the average 30-year fixed rate has dropped over 1.5% from its peak, hitting its lowest point in more than a year and a half after Friday’s jobs report. Meanwhile, the Fed Funds Rate? It hasn’t budged.
Now, don’t panic, this is totally normal! As we mentioned in last week’s newsletter (which you definitely read, right?), mortgage rates are based on bonds, which can adjust every day. The Fed Funds Rate, however, only moves every six weeks. So mortgage rates are like the rabbit, already miles ahead, while the Fed Funds Rate is the tortoise, taking its sweet time.
Let’s take a trip down memory lane for some perspective. The late 90s offer a good case study because, unlike 2008 or 2020, there weren’t any major crises. In every instance, mortgage rates dropped significantly BEFORE the Fed cut rates. Waiting for the Fed to act didn’t pay off. In 1995, those who waited had to endure five months before rates returned to pre-Fed levels. In 1998? A whopping four years! Yikes.
To make things even clearer, here’s a handy chart. It shows the Fed rate cuts on top of mortgage rate trends. It’s like looking at a treasure map where the “X” marks all the times people regretted waiting for the Fed.
No, this isn’t some sneaky sales pitch—this is a public service announcement! There’s a lot of misinformation floating around about Fed rate cuts, and we’re here to help. Think of it this way: waiting for the Fed is like placing a bet that rates will magically drop even lower. But here’s the thing about financial markets—if something can be predicted, it’s already being traded on today.
So why hasn’t the Fed Funds Rate dropped already, you ask? Great question! As we mentioned last week, there are futures contracts that people use to bet on the Fed Funds Rate, and those already reflect the lower rates everyone’s waiting for. These futures are way ahead of the Fed and move with present-day information, while the Fed Funds Rate is still snoozing in the background.
Here’s a chart that shows the rate implied by Fed Funds Futures for June 2025 (because September’s contracts have been kinda boring). Instead of using mortgage rates, which only update once a day, we’re using mortgage-backed securities prices—basically the tool lenders use to set your mortgage rate every day.
So, if you think you’re outsmarting the market by waiting for the Fed rate cut, think again. The market has already traded it, pushing mortgage rates down in the process. And it will keep trading, reacting to new info every single day, while the Fed only makes its move once every six weeks.
Anything can happen in the meantime. Just earlier this year in January, Fed Funds Futures showed the rate would be a full percentage point lower than it’s actually going to be after the cut in two weeks. But as new data came in, the market adjusted. Surprise, surprise!
The farther we look into the future, the more unpredictable things get. For example, expectations for the September meeting haven’t changed much (a modest 0.25%). But expectations for June 2025? They’ve moved a lot—1.5% since May 2024, to be exact!
Let’s recap: all that movement in mortgage rates has already happened, long before the Fed even has a chance to act! The Fed Funds Rate? It’s just sitting there, twiddling its thumbs until the next meeting.
One last thing: while the upcoming Fed rate cut is the headline-grabber, it’s not the only thing that can shake up the markets on Fed day. We’ll also get updated projections for future rates from each Fed member, which is notorious for making waves. Plus, Fed Chair Powell will probably weigh in on how fast future cuts might happen. The market has already shown its hand, as seen in the charts, but the Fed might play a more aggressive or cautious game.
And don’t forget the stream of economic data that will keep flowing after Fed day. If the economy hits a rough patch, rates could drop even lower. But if things stay steady, rates could creep back up. Everything that can be known about the future is already baked into today’s 1.5-year mortgage rate lows.