If you’ve heard that the Federal Reserve has been cutting interest rates, you might assume borrowing costs and bond rates should be falling too. However, long-term Treasury yields — and mortgage rates — have actually been rising recently. It feels backwards, but there’s a simple reason: the Fed controls only short-term rates. The free market controls long-term rates.
Since last fall, the Fed has lowered rates by 1.5 percentage points and is expected to cut again. Normally, that would pull long-term yields down. Instead, Treasury yields and mortgage rates have climbed.
Why? Because long-term rates depend on what investors expect, not what the Fed is doing today. And right now, the market is nervous about a few things:
Volatile trade policy. Global supply chains and trade relationships are shifting, increasing uncertainty.
Rising U.S. debt. Investors are demanding more return to compensate for long-term fiscal risk.
Skepticism about future Fed cuts. If inflation still feels too high, the market may disagree with continued easing.
Even though the Fed wants to move toward a more neutral policy, investors want higher yields to reflect the risks they see ahead. That’s why mortgage rates and other long-term borrowing costs aren’t falling — the free market is pricing in its own expectations. There is only so much direct power the Fed has over the rates you see as a consumer.
