If you’ve ever wondered why consumer mortgage interest rates don’t move in lockstep with the Federal Reserve’s federal funds rate for banks, there’s a clear explanation.

Interest rates are tied to benchmarks that reflect the duration of the debt. The federal funds rate governs short-term, overnight lending between banks, while consumer mortgages are long-term loans, often spanning up to 30 years.

As a result, mortgage rates are more closely tied to the 10-year Treasury note yield. This yield represents the interest the government pays to investors over a decade, making it a more accurate benchmark for long-term loans, such as mortgages. Because most homeowners don’t stay in their homes for the full 30 years, with an average tenure of about eight years, the 10-year Treasury is seen as the most accurate guide for mortgage rates.

Lenders determine mortgage rates by adding a “spread”, or the difference between the two rates, to the 10-year Treasury yield. This spread accounts for factors like the difference between mortgage-backed securities (MBS) and Treasury yields, as well as risks, inflation expectations, and market demand.

For example, you may remember that in September 2024, the Fed lowered the overnight rate by 0.5%, yet mortgage rates went up from 6.09% to as high as 6.84%. That’s because the bond market was influenced by other factors, such as inflation expectations and what the new Trump administration was expected to do with monetary and fiscal policy. Therefore, the Federal funds rate influences expectations of investors, but it is not the only variable affecting mortgage interest rates.