Monday, October 13, 2025
It seems like a sure thing, but a key question remains for American homeowners and those who want to own homes. That is, will lower interest rates help the housing market?
With the Federal Reserve’s recent interest rate cut plans, the overnight federal funds rate was again below the 10-year Treasury yield, which is a key metric for mortgages. But as happened last year, looser policy is pushing long-term rates higher.
In last year’s four-month series of rate cuts, the Fed dropped its policy rate 100 basis points as the 10-year Treasury yield rose the same amount. The latest cuts’ dovish framing should have given the bond market some comfort. However, longer-term yields are already rising.
As of this writing, the 30-year Treasury yield ended last week at 4.75%. That’s up 10 basis points from the day before the Fed rate action. Meanwhile, 30-year mortgage rates jumped even more (from 6.13% to 6.35%) in the same period.
Longer-term bonds react to issues like future inflation expectations and bond supply, not the Fed’s policy rate. Even worse, the bond market reaction could get uglier if inflation continues to accelerate.
No doubt, higher mortgage rates are a problem. But the real problem is higher home prices caused by the Fed’s previous monetary policies. When money was free, prices didn’t matter, and millions of buyers overpaid.
So, monetary policy created this problem. But there isn’t a good solution.
President Trump is demanding rate cuts for two primary reasons:
- Lower the interest we’re paying on federal debt, and
- Stimulate the housing market.
Unfortunately, the last couple years of rate cuts have produced higher longer-term rates. Levers are being pulled, but they’re not reacting the way policymakers want.