Long-term mortgage costs have actually increased since the Federal Reserve began cutting interest rates in September. Lower interest rates often mean lower mortgage costs.

But that’s not what’s happened since the summer. The yield curve has steepened. This more than offset any benefit from lower short-term rates for mortgage costs. Short-term rates have fallen as long-term rates have risen. Ultimately, how mortgage rates move will depend on how expectations for monetary policy and inflation move relative to market expectations. Fed projections suggest mortgage costs could decline over the medium term, but other factors will also play a role.

Recent movements in mortgage rates

After reaching a low of around 3% in 2020-2010, the 30-year mortgage rate has increased significantly since 2022, peaking at almost 8% in October 2023. It now stands at 6.8%. This rate is higher than the September low just above 6%.

Since the Fed began cutting interest rates, short-term and long-term interest rates in the United States have diverged. Short-term interest rates are now 0.75% lower than their August 2024 level after two Fed cuts in September and November. On the other hand, the 30-year mortgage rate is now 0.7% higher. This steepening of the yield curve and divergence of short- and long-term interest rates is not unusual, but is often associated with recessions according to estimates. Richmond Fed research.

The slope of the yield curve

THE inverted yield curve from summer 2022 to summer 2024 is historically less common than a positively sloped curve. In fact, the yield curve could steepen further. The curve is indeed flat today, but over the past few decades, long-term rates have peaked at 3 to 4 percent above short-term rates.

The good news for those hoping for lower mortgage rates is that much of that steepening could come from further interest rate cuts by the Fed rather than higher mortgage rates. For example the CME FedWatch Toolprojects that the Fed could reduce short-term interest rates below 4% by December 2025, although the potential outcomes of this implicit projection are wide-ranging.

What to expect from mortgage rates

The US bond market is one of the most liquid and sophisticated financial markets of all. As such, it is generally effective in incorporating current expectations for macroeconomic events. The Fed’s monetary policy easing over the next 12 months is already priced in to some extent.

If the Fed sees unexpected weakness in the U.S. economy and cuts rates more than expected, that could lower mortgage costs. Conversely, if inflation were to return and the Fed raised rates, then mortgage costs could increase. However, for now, there is some optimism that the United States will avoid both a recession and significant new inflation.

From their September projectionsFed policymakers expected short-term interest rates to fall to around 3% in the long term. If this prediction holds true, even with a steeper yield curve, it could ultimately lead to lower mortgage rates, although it could take some time.