Something surprising is going on with interest rates 😳

We all know how important interest rates are.

Our government wants lower rates so the payments on the national debt aren't as expensive.

Businesses want lower rates so they can more cheaply fund their projects and growth.

And the public generally likes lower rates because then we can buy the stuff we want with lower financing costs (like cars and houses).

Given all this, you can understand why there's a lot of pressure on the Fed to reduce the Federal Funds Rate so that we can all get the lower rates we want.

But if the Fed cuts, will we actually get lower rates?

Based on the number of clients who are waiting on the Fed to cut rates before they take action, we've got to make sure we know this answer.

What's going on with the Fed & interest rates? 🧐

Let's start by looking at a chart to see how interest rates have changed since the beginning of 2024 to get some background:

The black line is the Federal Funds Rate and you can see three different key interest rates moving along with it:

• The green line is the rate on a 2-Year U.S. Treasury, 
• Blue is the interest rate on a 10-Year U.S. Treasury.
• And the purple line is the yield on a 30-Year U.S. Treasury. 

HELOCs, credit cards, car loans, and other short-term loans move in unison with the Federal Funds Rate and short-term interest rates like the 2-Year Treasury.

Mortgage rates move in sync with the 10-Year Treasury since that's about as long as the average person owns their house.

Lastly, some jumbo loans, annuities, and life insurance products track along the 30-Year Treasury.

Now, let's go over three big takeaways that you must know about the Fed and interest rates.

1. The Fed mainly controls short-term rates. 🏛️

First, most people think the Fed controls all interest rates but that's not entirely correct.

The truth is, the Fed sets the Federal Funds Rate which is the short-term interest rate that banks pay when they need to borrow money overnight.

This doesn't mean the Fed has no influence on longer-term rates, but it's important to realize that when the Fed "cuts rates," it has a greater impact on the shorter-term interest rates.

For example, look at how the green line drops further than the other lines around the time the Fed started cutting rates towards the end of 2024 in the graphic above.

You can also see that the green line (2YR) stays lower than the blue (10YR) and purple (30YR) lines as the Fed held rates at 4.3% so far this year.

2. Interest rates move ahead of the Fed. 📉💨

Next, realize that interest rates are a bit like children.

When you tell your kids that you might do something, they immediately expect that you will do that thing.

The truth is you never said it was 100% happening, but expectations adjust and if you don't do it, they're disappointed. 

In the markets, when the Fed says they might do something, investors start to expect it and go ahead and take action based on those new expectations. 

With this in mind, watch the lines move in the graphic above and you'll notice that the colored lines drop before the Fed cuts the Fed Funds Rate.

This is because investors started to expect as many as six Fed rate cuts in 2025 and interest rates declined in advance of any actual Fed action.

Then, when expectations were lowered from 6 cuts to just 2-3, you can see the colored lines jump up - even though the Fed was taking real action lowering the Fed Funds Rate at that time.

3. Long-term rates are going in the opposite direction of short-term rates. 🔀

Lastly, this one and has huge implications for mortgage rates - and your business! 

Usually, when the Fed starts moving interest rates, you'll see all of them go the same direction.

This happened right before the Fed started cutting in 2024.

But today, we're getting a divergence: rates are going in different directions.

Short-term rates declining and long-term rates holding steady/increasing.

Even though the Fed is telegraphing that they'll cut rates again, investors are concerned about inflation risks and it's keeping longer-term rates elevated.

This could be a sign that we'll need something stronger than Fed rate cuts to get lower mortgage rates.

The Bottom line ✅

If you’re buying or selling a home, you’ve got to understand the basics of how mortgage rates really work. The Fed may cut rates again in the coming months, but that doesn’t always mean mortgage rates will drop like everyone expects. Buyers who don’t know this could wait for “better rates” that never come—and miss the right house. Sellers could hold off, expecting more buyers to flood the market, only to be disappointed.

The truth is, understanding how rates actually move helps you make smarter timing decisions whether you’re buying or selling. Having the right expectations can save you time, money, and a lot of stress in today’s market.

Credits to Dr. Alex Stewart, The Market Distillery Founder