Why Mortgage Rates Don't Follow the Fed — And What Actually Drives Them

Data note: Mortgage rate data sourced from Freddie Mac's Primary Mortgage Market Survey (PMMS). Treasury yields from the Federal Reserve Economic Data (FRED) database. All figures current as of February 27, 2026.

The Federal Reserve has cut interest rates seven times since September 2024 — a total of 175 basis points. The federal funds rate went from 5.25–5.50% down to 3.50–3.75%.

So why is the 30-year mortgage rate still at 5.98%?

This is the single most common question I get from buyers right now. And the answer is one of the most misunderstood parts of real estate: the Fed does not set mortgage rates.

What the Fed Actually Controls

The federal funds rate is the rate banks charge each other for overnight loans. It's a short-term rate — literally overnight. When the Fed cuts this rate, it directly affects things like credit card APRs, auto loans, and home equity lines of credit (HELOCs). Those are all tied to short-term lending.

A 30-year fixed mortgage is a different animal. You're locking in a rate for three decades. Lenders aren't pricing that off an overnight rate. They're pricing it off the bond market — specifically, the 10-year U.S. Treasury yield.

The Real Driver: The 10-Year Treasury

The 10-year Treasury yield reflects what investors demand to lend money to the U.S. government for 10 years. It bakes in expectations about inflation, economic growth, and risk over that horizon. Since a 30-year mortgage has a similar duration profile (most mortgages are paid off or refinanced within 10 years), mortgage lenders price their rates as a spread above the 10-year Treasury yield.

Here's where things stand today:

Notice the disconnect: the Fed cut 75 basis points over the past year, but the 10-year Treasury only fell 43 basis points. That's because long-term yields are driven by market forces — inflation expectations, global capital flows, government debt supply — not Fed policy alone.

The good news: mortgage rates still fell 78 basis points year-over-year. That's because rates benefited from two tailwinds — a lower Treasury yield and a narrower spread. Which brings us to the second piece of the puzzle.

Mind the Spread

The gap between the 10-year Treasury yield and the 30-year mortgage rate is called the mortgage-Treasury spread. Think of it this way: if the Treasury yield is the cost of raw ingredients, the mortgage rate is the price on the menu, and the spread is the restaurant's markup.

That markup isn't fixed. It moves based on risk conditions in the mortgage-backed securities (MBS) market. And for the past few years, it's been abnormally wide:

The spread blew out in 2022–2023 because the Fed was actively selling mortgage-backed securities (quantitative tightening), the banking sector was stressed after SVB collapsed, and prepayment risk was elevated. All of that made investors demand a bigger premium to hold mortgage debt.

Since then, the spread has been compressing — slowly returning toward the historical average of ~170 bps. The Federal Housing Finance Agency (FHFA) directing $200 billion in MBS purchases helped. So did calmer credit conditions and reduced volatility.

Here's the key insight: if the spread alone normalizes from 196 bps to 170 bps, mortgage rates drop another quarter point — without the Fed doing anything. That would put the 30-year rate in the mid-5% range, the lowest since 2022.

What the Yield Curve Is Telling Us

There's one more indicator worth watching: the yield curve — specifically, the spread between the 10-year and 2-year Treasury yields.

When the 2-year yield exceeds the 10-year yield, the curve is "inverted." An inverted yield curve has preceded every U.S. recession since the 1970s. From mid-2022 through most of 2024, the curve was deeply inverted — the longest inversion in modern history.

That inversion is over. As of February 2026, the 10-year yield sits about 59 basis points above the 2-year yield. The curve is normal again. Bond markets are pricing in moderate economic growth rather than imminent recession.

For housing, a normal yield curve means long-term rates (including mortgages) are priced on growth expectations rather than fear. It's not a guarantee of rate declines, but it removes the recession-driven volatility that made mortgage pricing erratic over the past two years.

The Fed's Path From Here

For context, here's the full timeline of Fed actions since the rate-cutting cycle began:

The Fed held in January 2026 and signaled a cautious pace going forward. Markets are pricing one more cut in mid-2026, but the dot plot suggests the days of aggressive cuts are behind us. Inflation remains "somewhat elevated" according to the FOMC statement, and the Fed expects it to stay above 2% until 2028.

What this means for mortgage rates: don't bank on Fed cuts alone to push rates significantly lower. The more meaningful variable is the mortgage-Treasury spread. If it continues compressing toward the 170 bps historical average, rates can improve independent of Fed action.

What This Means for NJ Buyers and Sellers

Here's how I'm framing this for clients right now:

For buyers: Sub-6% mortgage rates are the best we've seen since September 2022 — over three years. If you've been waiting for rates to come down, they have. You don't need to wait for 4% rates (which would require the 10-year Treasury to fall to ~2.3%, a level we haven't seen since the pandemic). Today's rates are workable, and the spring 2026 market will be more competitive than the winter market you're in right now.

For sellers: The lock-in effect is starting to crack. Homeowners who bought or refinanced at 3–4% have been reluctant to sell and take on a higher rate. But as rates move into the mid-to-high 5% range, more of those homeowners will move — life events (job changes, growing families, downsizing) eventually override rate math. Expect gradually improving inventory through 2026.

For investors: Watch the spread. If the mortgage-Treasury spread normalizes to 170 bps and the 10-year holds around 4%, that's a 5.70% mortgage rate — meaningfully better for cash flow analysis. Run your numbers at both 5.98% and 5.70% to see how sensitive your deal is. Use the NJ investment calculator to model different rate scenarios.

For refinancers: If you bought in 2023 or early 2024 and locked in above 6.75%, today's rate already saves you. A $500K loan at 6.76% vs. 5.98% saves approximately $260/month. That's worth a conversation with your lender.

The Bottom Line

Stop watching the Fed and start watching the 10-year Treasury yield and the mortgage-Treasury spread. Those two numbers tell you more about where mortgage rates are headed than any FOMC press conference.

Right now, both indicators are moving in the right direction. Rates just broke below 6% for the first time in three and a half years. The spread is compressing toward historical norms. And the yield curve is signaling stable growth rather than recession.

This is the most favorable rate environment for NJ buyers since 2022. It may not last.

Related Reading

• First-Time Home Buyer's Guide to New Jersey (2026) — step-by-step guide including how to lock in the best rate
• How to Sell Your NJ Home in 2026 — pricing and timing strategy in the current rate environment
• Passaic County: A Buyer's Market Worth Watching — investment analysis with cash flow modeling at current rates

Data sourced from Freddie Mac Primary Mortgage Market Survey, Federal Reserve Economic Data (FRED), and FOMC meeting statements. This article is for educational purposes only and does not constitute financial, investment, tax, or legal advice. Mortgage rates change daily; consult a licensed mortgage lender for current quotes. Mahesh Sangisetty | NJ Licensed Realtor #2334343 | Boutique Realty