Interest-rate cuts are underway at the Federal Reserve, but consumers have yet to get much relief. The rates individuals pay on loans from banks and credit card companies have barely budged, while would-be homebuyers hoping for relief from lower mortgage rates have instead seen those rates rise.
The average rate on a new 30-year adjustable mortgage rose as much as 6.79% earlier this month, according to Freddie Mac. That’s lower than when rates peaked at nearly 7.80% a year ago but higher than their most recent trough of 6.08% at the end of September. This comes as the Fed has reduced its benchmark policy rate by 0.75% since September. Conventional wisdom says consumer borrowing rates should fall as the Fed cuts.
So what’s going on? The answer lies in the bond market.
Mortgage Rates Are Tied to Long-Term Bond Yields
The federal funds rate is the rate banks use to borrow and lend to each other overnight. The central bank uses it to control the direction of monetary policy. Increasing the rate makes borrowing more expensive and slows the economy while reducing the rate (as the Fed is doing now) lowers borrowing costs and stimulates economic activity.
Many consumer interest rates—including credit card APRs, auto loan rates, and yields on high-yield savings accounts—are closely tied to the federal funds rate. But mortgages are more closely linked to yields on longer-term Treasury bonds, which have been rising as investors recalibrate their expectations about the state of the economy years down the line.
“The mortgage market primarily tracks long-term bonds—the 10-year Treasury—and the Fed only explicitly controls those very short-term rates,” explains Brian Rehling, head of fixed-income strategy at the Wells Fargo Investment Institute. “There are times when those two movements can diverge, as we’re seeing now.”
Long-Term Bond Yields Have Been Climbing
Yields on the 10-year Treasury note spiked after Donald Trump’s victory in the US presidential election, and they’ve continued climbing. Yields are now hovering around 4.41%, 80 basis points higher than their most recent trough of 3.64% in the middle of September.
Treasury Yield and Federal Funds Rate
That dramatic rise is tied to expectations that economic growth will remain strong in the months ahead, as well as concerns about the inflationary impact of certain Republican policy proposals, such as tariffs, tax cuts, and more deficit spending.
Rehling explains that if economic growth and inflation rise, long-term bond investors will demand more yield to compensate for the risks of locking up their money with the government. That leads to higher yields on the 10-year Treasury, and in turn, higher mortgage rates.
Other Consumer Rates Are Inching Lower
Shorter-term consumer rates haven’t seen the same spike, but they aren’t falling dramatically either. Morningstar equity analyst Michael Miller says that for consumer loans in general, the scope (and direction) of rate movements over the past few months “comes down to how heavily tied they are to long-term interest rates.” He points out that longer-term auto loans have been relatively flat since the middle of the year.
Existing credit card holders, on the other hand, have seen a little relief. Miller explains that most credit card APRs are variable, and closely tied to the federal funds rate. That means existing cardholders have seen their rates change as the fed-funds rate has dropped. Miller adds that in general, rates on new credit card accounts fell more slowly than the Fed’s benchmark rate during the pandemic and rose at the same pace or faster as the Fed hiked. Simple profit-taking on the part of lenders could be one explanation for the disparity.
The average interest rate on a credit card was 20.35% last week, according to Bankrate. To calculate that statistic, Bankrate takes the average midpoint of the annual percentage rates assessed by more than 100 popular credit cards issued by the 50 largest US-based issuers. The average interest rate is slightly lower than the peak of 20.79% set in August when the federal funds rate was still at its peak for this cycle.
Loans Aren’t One-Size-Fits-All
Analysts say consumers waiting for relief from lower borrowing rates should remember that consumer loan terms are determined by individual factors in addition to market forces. Generally, higher credit scores lead to preferable loan terms, while lower scores or sparse credit history mean a higher interest rate.
“Just because interest rates decrease for credit cards or personal loans doesn’t mean that you’re going to get the better rate when you apply,” says Michele Raneri, vice president and head of US research and consulting at TransUnion. “I think people overgeneralize a little bit about the interest rates without thinking about their situations.”
What’s Next for Interest Rates?
In public comments last week, Fed Chair Jerome Powell appeared to pump the brakes on the pace of easing in the months ahead. “The economy is not sending any signals that we need to be in a hurry to lower rates,” he said, citing strong growth and progress bringing inflation back to target. That means that even with another 0.25% interest-rate cut likely coming in the Fed’s final meeting of 2024, consumers shouldn’t expect a dramatic drop in interest rates any time soon. Barring any major change in the economy, it’s more likely the Fed will bring rates down gradually over the next few quarters.
Lawrence Yun, chief economist for the National Association of Realtors, predicts mortgage rates around 6% will be the “new normal” for 2025. He says a return to the rock-bottom 3% rates of 2021 and 2022 is very unlikely, though further cuts could drag longer-term bond yields down.
Concerning 10-year Treasury yields, Rehling says the risks are tilted to the upside. Given that the path of fiscal policy is still uncertain and the economy remains strong, he expects the 10-year yield to remain at 4%-5%. “I think we’re going to live in this area until something changes … some event that slows the economy more materially,” he says, “or perhaps we have a lot of spending.”