Mortgage Rates Don’t Hinge on the Fed. What Ultimately Drives Them.

(Zak Bennett/Bloomberg)

President Donald Trump has centered the housing market in his criticism of the Federal Reserve’s reluctance to cut interest rates. But, with a few exceptions, the central bank has only tangential sway on the near-term direction of mortgage rates.

The housing market has hobbled along for three years. Existing-home sales fell to a nearly 30-year low in both 2023 and 2024, and this year isn’t looking much better. The drop in sales follows a rapid run-up in both home prices and mortgage rates that made housing unaffordable for many.

Trump has pinned responsibility for the tepid market on Fed chair Jerome Powell. “Because of him and his high interest rates, the housing is less than it could be,” Trump said Tuesday. “Once we have a majority, housing is going to swing, and it’s going to be great.”

Shifts in monetary policy were in part responsible for mortgage rates’ rapid drop and significant climb during the pandemic as the central bank, aiming to stem a crisis, bought mortgage-backed securities. But mortgage rate movements are typically driven by economic data, not Fed decisions.

Absent any reductions to the federal funds target rate this year, fixed 30-year mortgage rates have retreated nearly 0.5 percentage point from their 2025 peak in January to a recent 6.56%, according to Freddie Mac—the lowest weekly average since October 2024.

That is because 30-year fixed-rate mortgages typically move with the 10-year Treasury yield, which is influenced by long-term expectations for the economy, including but not limited to long-term expectations for monetary policy and inflation. Two of the largest weekly declines in mortgage rates, one in March and one earlier this summer, came as economic expectations softened.

The Federal Reserve generally only influences mortgage rates to the extent that it influences the overall economy, notes Walt Schmidt, FHN Financial senior vice president of mortgage strategies.

That’s likely why 10-year Treasury yields, and, by extent, mortgage rates, have largely shrugged off news surrounding upcoming personnel changes at the central bank in favor of economic data. The Fed is facing significant turnover, with Powell’s term coming to an end next year, Fed governor Adriana Kugler stepping down, and the administration’s attempt to remove Fed governor Lisa Cook.

“Let’s hope that the data continues to dominate [monetary] policy, and not other things,” says Schmidt.

Questions about the Fed’s independence could drive financing costs higher, Mortgage Bankers Association economists Mike Fratantoni and Joel Kan wrote in recent commentary. The trade group expects mortgage rates to hover in the mid-to-high 6% range through 2026.

“The U.S. has benefited for decades from a strong and independent Federal Reserve which aimed to conduct monetary policy in the pursuit of the goals of price stability and maximum employment,” they wrote. If the Fed is pushed to deliver short-term boosts to the economy, investors will fear higher inflation. That concern, in turn, would send longer-term rates, including those on mortgages, higher, they added.

The Fed has the tools to influence mortgage rates directly, notes FHN’s Schmidt—but it has only done so to stem or avoid crises. The central bank bought mortgage-backed securities and Treasuries in the wake of the 2008-09 financial crisis, and during the Covid-19 pandemic. The Fed’s Covid-era purchases helped send mortgage rates to historic lows in 2020 and 2021.

Powell said in March that the central bank “really, strongly” desires to let mortgage-backed securities roll off its balance sheet. “The Fed typically handles monetary policy by moving the policy rate, and they typically don’t engage in extraordinary measures except in times of crisis,” Schmidt adds.

Some adjustable loan products, like mortgages pegged to the Secured Overnight Financing Rate, or SOFR rate, are more closely tied to Federal Reserve decisions. “When the Fed cuts, SOFR rates will move down in lockstep,” says Rick Palacios, Jr., director of research at John Burns Research and Consulting. “Much of what we’re seeing right now is negative in terms of the housing industry, but I think that that is a bit of a silver lining.”

Those considering a 30-year fixed rate mortgage shouldn’t count on the same improvement following a Federal Reserve rate cut. Mortgage rates could shrug off rate cut news from the Fed, as they did last September.

Prospective buyers have yet to notice that 30-year mortgage rates have moved down, says Ed Laine, an eXp real estate agent based in the Seattle metropolitan area.

Fluctuations in mortgage rates aren’t typically on average borrowers’ radars until Federal Open Market Committee meeting decisions hit the headlines. “Wall Street reacts to what’s anticipated weeks before,” Laine notes. “I’m telling my team: talk to your buyers now, because rates have already started to trend downward.”

Write to Shaina Mishkin at shaina.mishkin@dowjones.com