Summary
This post explains how a 0.25% Fed rate cut (prime rate drop) affects mortgage rates. It covers what to expect immediately after the announcement, how rates may move the following day, and the likely impact one week later. Readers will learn that mortgage rates don’t move lockstep with the Fed rate, but instead respond to Treasury yields and MBS trading, with real-world expectations in basis points.
Explanation In Layman’s Terms
Instead of making you wade through paragraphs before I get to the point, I’ll start with the takeaway right here. For those who want the full explanation, I’ll expand below.
The Fed is meeting today and they are expected to reduce the prime rate by .25%. Mortgage rates will not drop by .25%. Because the cut is widely expected, we might see 5-10 basis points for the better. To understand how much that is, basis points would have to drop 10 times that for the rate to drop .125% or more. In the coming weeks, hopes would be that we get a total of 10-20 basis points. In a month or two, we could see .25% or more in total rate drop. You too can track the outcome of the Fed meeting today.
Explanation of Mortgage Rates related to the Fed Rate
The prime rate follows the Fed Funds rate, which moves when the Fed makes a change. Mortgage rates, though, don’t directly track the prime rate — they mainly follow the 10-year Treasury yield and investor demand for mortgage-backed securities (MBS).
Mortgage rates usually don’t drop by the full 25 bps the same day. Instead, traders in the bond market reprice MBS (mortgage backed securities) yields. If the cut was widely expected, much of it may already be priced in. You might see 5–10 bps movement in mortgage rates today, if at all.
Regarding next day mortgage rate pricing, lenders may adjust published rates depending on how the bond market settles overnight. If Treasury yields drop further, mortgage rates could ease another 5–15 bps. You can track the mortgage rate market yourself.
The big picture is that a 25 bp Fed cut might translate to only about 10–20 bps lower mortgage rates in the near term, if markets weren’t already expecting it. Then, in the following month or 2, if inflation data or economic new pops up, it could erase or amplify the Fed cut impact — mortgage rates can even tick back up despite the cut.
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