No Relief in Sight: Why Mortgage Rates and Borrowing Costs Are Stuck Despite Fed Cuts

A version of this article was previously published on Nov. 20, 2024.

Key Takeaways

• The Fed has cut interest rates by a full percentage point since September, but further rate cuts are on hold, pending more clarity about inflation and the path of policy in Washington.
• Consumer borrowing rates tied to the key federal-funds rate will likely stop falling.
• Mortgage rates have spiked because they closely track long-term bond yields, which have risen on expectations of higher inflation.
• Analysts expect longer-term bond yields to go sideways, meaning homebuyers won’t see much relief.

Consumers hoping for relief from sky-high mortgage rates and other borrowing costs will have to keep waiting. The Federal Reserve has cut interest rates by a full percentage point since September, but it is now likely to leave rates at their current levels for at least the next few months while it awaits more clarity on the path of inflation and new policies in Washington.

That means consumer borrowing rates tied to the Fed’s overnight lending rate, like credit card APRs, will likely stop falling. Meanwhile, analysts say some of the same forces that prompted the Fed to pause, like the threat of higher inflation, will help keep mortgage rates near their multi-year highs.

Credit Card Rates Edged Lower, but Progress Will Stall

For consumer loans in general, the scope and direction of rate movements over the past few months comes down to how closely tied they are to short- or long-term interest rates, as Morningstar equity analyst Michael Miller recently explained.

Credit card rates tend to be variable, and are closely tied to the federal-funds rate—the interest rate banks use to borrow or lend to each other overnight. The funds rate is the lever the Fed uses to tighten or loosen monetary policy. Raising that rate makes borrowing more expensive and slows the economy, while reducing it lowers borrowing costs and stimulates economic activity.

When the Fed lowers rates, credit card rates tend to fall too. If you have a card, “your rate will eventually stair-step lower alongside what the Fed is doing,” explains Greg McBride, chief financial analyst at Bankrate, though it could take up to three months for the changes to trickle through. Overall, credit card rates edged lower after rate cuts began. The average rate on a credit card—both those carrying a balance and those without one—dropped to 21.47% in November of last year after peaking at 21.76% in August, according to data from the Federal Reserve.

However, that downward momentum is unlikely to continue, unless the Fed changes course. “The Fed is now pausing,” McBride says, and “credit card rates are going to pause as well. You won’t see further declines until the Fed resumes cutting interest rates.”

Mortgage Rates Rose Despite Fed Cuts

While credit card rates tend to follow the Fed, mortgage rates are different. When the Fed enacted its first cut rates last September, ending its historic tightening cycle, would-be homebuyers across the country breathed a sigh of relief. The hope was that mortgage rates, which had climbed from once-in-a-generation lows below 2% in 2020 to eyewatering highs above 7% by 2023, would start falling back to earth. But that didn’t happen.

The average rate on a new 30-year fixed-rate mortgage hit 7.04% earlier this month, according to Freddie Mac, and it’s now hovering at 6.95%. That’s lower than when rates peaked at nearly 7.80% a year ago, but significantly higher than their most recent trough of 6.08% at the end of September.

Mortgage rates kept rising because they are more closely linked to yields on longer-term Treasury bonds, which have been rising as investors recalibrate their expectations for 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.”

Yields on the 10-year Treasury note spiked after Donald Trump’s victory in the US presidential election, and they continued climbing in subsequent weeks. They peaked at 4.79% earlier this month—1.17 percentage points higher than their trough of 3.62% in the middle of September. Recently, yields have inched off those highs, and they now hover around 4.52%.

That dramatic rise in bond yields 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 puts upward pressure on mortgage rates.

Personal and Auto Loan Rates Are Less Rate Sensitive

Interest rates for personal and auto loans tend to be less sensitive to the Fed’s moves than rates for credit cards and mortgages, though some measures of these rates have also ticked up since the central bank began cutting.

The average interest rate on a 24-month personal loan was 12.33% in November, up from 11.92% the prior quarter, according to Fed data. Meanwhile, the average rate on a 72-month loan for a new car was 8.76% in November, compared with 8.32% three months prior.

McBride points out that personal and auto lenders often account for macro conditions and individual creditworthiness when determining loan terms. For instance, rather than lowering rates broadly as the Fed cuts, personal lenders may “loosen the reins on being able to qualify.”

And with delinquency rates at multiyear highs, McBride says these lenders could be more inclined to price loans with a wider margin to compensate for the risk that borrowers might not pay them back. That holds true even if rates are falling.

What’s Next for Interest Rates?

After slashing rates last fall, central bankers are now pumping the brakes on the pace of easing in the months ahead. Inflation is still a little above target, and economic growth looks strong. There’s no rush to cut. Markets are pricing in between one and two more quarter-point cuts this year, and strategists expect longer-term bond yields to remain rangebound for the time being.

Given that the path of fiscal policy is still uncertain and the economy remains strong, Rehling expects the 10-year Treasury yield to remain at 4%-5% until we see material changes to the economic outlook or more clarity on the path of fiscal policy.

Even if the Fed resumes rate cuts and bond yields fall, consumers should not expect a speedy return to the rock-bottom rates of the 2010s.s, recently predicted that mortgage rates of around 6% will be the “new normal” for 2025. He says a return to the rock-bottom 3% rates of 2021 and 2022 is unlikely, though further rate cuts could drag longer-term bond yields down. Analysts from Fannie Mae forecast that mortgage rates will end 2025 at 6.3% and E2026 at 6.3%.

And even if the Fed resumes rate cuts and bond yields fall, consumers should not expect a speedy return to the rock-bottom rates of the 2010s. “Interest rates took the elevator going up, but they’re going to take the stairs coming down, and they’re not going to come all the way down,” McBride asserts. “Even once the Fed is done cutting, rates will settle at a level higher than we had seen [between 2008 and 2022].”