So, the Fed dropped the interest rate by a quarter point on short term loans such as car loans and credit cards, then why did the mortgage rates go up?

The relationship between Federal Reserve (Fed) rate changes and mortgage rates can be confusing. Here’s a clear, document-backed explanation:

Why Fed Rate Cuts Don’t Always Lower Mortgage Rates

• What the Fed Controls:

  • The Federal Reserve sets the federal funds rate, which is an overnight rate banks charge each other for very short-term loans.

  • This rate directly affects short-term borrowing products like credit cards, auto loans, and home equity lines of credit (HELOCs).

• How Mortgage Rates Are Set:

  • Most mortgage rates (especially 30-year fixed) are tied to the yields on long-term bonds, primarily the 10-year U.S. Treasury note and mortgage-backed securities (MBS).

  • Mortgage rates are influenced by a mix of market expectations for inflation, the economy, and investor demand for these bonds—not directly by Fed rate changes.

• Why Mortgage Rates Might Rise After a Fed Cut:

  • When the Fed cuts rates, it can signal that the Fed is worried about inflation or the economy. If investors fear inflation will rise, they demand higher yields on long-term bonds, pushing up mortgage rates.

  • Sometimes, the Fed cut is already “priced in,” meaning markets expected it, and mortgage rates had already adjusted ahead of time.

  • If bond investors think the Fed isn’t doing enough to control inflation, they may sell Treasuries and MBS, driving prices down and yields (mortgage rates) up.

• Short-Term vs. Long-Term Rates:

  • Short-term rates (credit cards, car loans) track the Fed much more closely.

  • Long-term rates (mortgages) are set by the broader bond market, which includes expectations for future Fed moves, inflation, and economic growth.

In Summary:

• The Fed’s rate cut directly lowers short-term loans and credit cards.

• Mortgage rates, however, are set by investor demand for long-term bonds and expectations about inflation and the economy.

• Sometimes, mortgage rates can go up after a Fed rate cut if investors are worried about inflation or if the cut was already expected.