The average 30-year mortgage has jumped to 7.49%, the highest since November 2023. This is happening while everyone continues to obsess over what the Federal Reserve will do at its next meeting as if the Fed chairman personally sets the mortgage rate at your local bank. He does not. Mortgage rates are tied far more closely to the bond market, particularly longer-term Treasury yields, and those yields have been rising because investors are demanding more to lend money long term.
The US 30-year Treasury yield has now reached its highest level in 24 years. That is the part most real estate salesmen conveniently leave out when they tell people to wait for the Fed to cut rates. The federal funds rate is an overnight rate. A mortgage may remain on the books for 30 years. Banks and investors therefore care about inflation, Treasury yields, government borrowing, credit risk and where interest rates may be years from now. Cutting the overnight rate does not magically erase those risks.
Washington has also become the largest competitor for capital in the room. The federal debt has exceeded $40 trillion and Treasury must continuously sell enormous quantities of securities to finance deficits and refinance maturing debt. Investors have choices. If they can earn around 5% lending to the US government, they are not going to finance somebody’s house for 3% simply because a realtor says mortgage rates should come down.
The pandemic housing market was an anomaly. The Fed drove rates to zero, bought trillions in securities, and helped push mortgage rates below 3%. Buyers became accustomed to borrowing money at rates that made no economic sense over the long term. That distorted home prices, encouraged speculation and created today’s lock-in problem because millions of homeowners understandably refuse to surrender mortgages carrying rates that may never return in their lifetimes.
Even if the Fed suddenly cut rates to zero at its next meeting, that would not automatically return mortgage rates to 3%. If investors believed such a move would reignite inflation, long-term Treasury yields could actually rise. The bond market is not obligated to follow the Fed blindly, and right now the market is looking at enormous government deficits, higher energy costs, persistent inflation, and an endless supply of new sovereign debt.
Warsh could walk into the Fed tomorrow and slash short-term rates dramatically, and he still could not order mortgage rates back to 3%. He does not control the 10-year Treasury or control what investors demand to hold mortgage-backed securities, and he certainly cannot force private capital to lend money for 30 years at a rate it considers too low. If the bond market believes inflation, government borrowing, or geopolitical risk requires a higher return, long-term yields can rise even as the Fed cuts. Warsh can influence the cost of money at the short end, but he cannot repeal the market. Washington may believe it controls interest rates. Capital ultimately decides what it is willing to accept.
The obsession with the Fed is therefore misplaced. The problem is much larger than one central bank meeting. Government debt is competing for capital, the long end of the bond market is demanding higher yields, and the era of virtually free money distorted housing for more than a decade. Mortgage rates are simply reflecting that reality.