A new paper from Yale professor Kelly Shue argues that consumers mistakenly wait to take out mortgages and other long-term loans when the Fed is expected to cut rates.
Their confusion seems to be related to conflating short-term and long-term rates, which don’t necessarily move in tandem.
In fact, short-term rate moves are typically already baked in to long-term rates, meaning there’s no need to wait until the cut is official for an even lower interest rate.
The savings of short-term rate cuts should already be reflected in the interest rate of a long-term loan such as a 30-year fixed mortgage.
Despite this, home buyers and even professional forecasters tend to get this wrong according to the research.
Short-Term Rates vs. Long-Term Rates
Consumers have long misunderstood the relationship between the Fed and mortgage rates.
Many incorrectly believe that the Fed directly controls mortgage rates. So when the Fed announces a rate cut, prospective home buyers expect mortgage rates to come down as well.
For example, the Fed is widely expected to lower its fed funds rate by 25 (or maybe 50 basis points) at its September 18th meeting.
When this takes place, there will be a slew of articles written about how “mortgage rates fall” and the like.
Some may even assume that the 30-year fixed fell by the same amount, whether it’s 0.25% or .50%.
So if the 30-year fixed was 6.50% the day before the meeting, a hypothetical home buyer might think the going rate is 6.25% or even 6% the next day.
In all likelihood, they’ll probably be disappointed if and when they speak to their loan officer or mortgage broker.
Chances are mortgage rates won’t budge much at all. And perhaps worse, they could actually rise after the Fed announces a rate cut!
This all has to do with short-term and long-term rates, with the fed funds rate a short-term rate and the 30-year fixed a long-term rate.
While they can impact one another, there isn’t a direct correlation. This is why you don’t hear mortgage rate experts telling you to use the fed funds rate to track mortgage rates.
Instead, the 10-year bond yield is a good way to track mortgage rates, since historically they have a very strong correlation.
Simply put, they are both long-term rates and function fairly similarly because many home loans are paid off in a decade or so despite being offered a full 30 years .
Should You Wait for the Fed to Cut Rates Before Refinancing (or Buying a Home)?
That brings us to consumer behavior surrounding rate cuts and hikes. Before we talk about rate cuts, which are finally on the table, let’s talk about rate hikes.
When the Fed is expected to hike rates, people tend to rush out and lock their loan before rates go up even more.
The researchers, which include Professor Shue, Richard Townsend, and Chen Wang, argue that this too is “a mistake.”
They note that knowing “that the Fed plans to gradually increase short rates does not mean that long rates will gradually increase in tandem.”
Conversely, they say “the long rate jumps immediately in response to such an announcement,” meaning there isn’t a rush to lock your rate before the Fed acts.
Now when we flip the script and consider a rate cut, the same logic applies. If you’re waiting to buy a home or refinance your mortgage due to an impending rate cut, it might be a mistake.
The Fed rate cuts are mostly telegraphed in advance and known to market participants. So there won’t be a big surprise on the day of the announcement that leads to a significant improvement.
At least not with regard to the rate cut announcement itself. This is why mortgage rates often defy logic on the day Fed announcements take place.
Sometimes the Fed raises its rate and mortgage rates fall. And sometimes the opposite happens.
And again, this is due to the disparity between short-term and long-term rates.
What About Long-Term Monetary Policy?
While I agree with the researchers on the point of short-term rate cuts already being baked in to longer-term rates like 30-year mortgages, there’s one other thing to consider.
The expected long-term monetary policy of the Fed. If they are just beginning to cut short-term rates, there is a chance long-term rates continue to improve over time.
I know, the researchers already debunked this with their talk about gradually increasing rates, saying people “fail to recognize that the current long rate already reflects future expected changes in short rates.”
And at the moment, the consensus is for the Fed to cut rates 200 basis points or more over the next year, per CME.
By the September 17th, 2025 meeting, the fed funds rate could be in a range of 3% to 3.25%, down from 5.25% to 5.50% currently.
Sure, you could argue that this too is somewhat baked in to long-term rates at the moment, but there’s still a degree of uncertainty.
If and when the Fed does actually begin cutting rates, instead of merely hinting at it, we could see longer-term rates trickle down further.
Of course, that will depend on economic data and things like inflation and unemployment, which will only reveal themselves over time.
But if you look at the rate tightening cycle, which involved 11 Fed rate hikes between early 2022 and mid-2023, you’d see that mortgage rates kept getting worse and worse.
Granted that too was driven by the underlying economic data, namely out-of-control inflation.
Still, the 30-year fixed surged from roughly 3% in early 2022 to around 8% during that span of time. So those who did go out and lock their rate ASAP were rewarded.
Even someone who chose to take out a 30-year fixed in March 2022 was able to snag a ~3% rate versus a rate of nearly 6% by as early as June of that same year.
In other words, what the Fed has already indicated might be baked in to rates today, but what we’ve yet to find out could push rates even lower as time goes on.
There’s no guarantee mortgage rates will continue to decrease from here, but it’s decently likely if economic data continues to come in cold.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
