Fed rate cuts aren't lowering long-term rates: what 70 years of data shows

What's happening

Since June 2024 the Federal Reserve has lowered the federal funds rate from 5.33 percent to 3.63 percent. Over the same two years the 10-year Treasury yield went from 4.31 percent to 4.57. The gap between the two rates is not the story: the 10-year has sat above the policy rate for most of the past seventy years, and the current spread is close to the middle of its historical range.

The story is the missing relief. In every two-year stretch since 1954 in which the Fed cut by at least a point and a half, the 10-year fell alongside the policy rate by a median of 1.19 points. This cycle it has not fallen at all: it is up 0.26 points.

Why mortgage rates are not falling with the Fed

The fed funds rate is an overnight rate between banks. Almost nothing a household or business pays is priced off it directly. Mortgages, car loans, business credit, and corporate bonds price off the long end of the curve, and the long end has not moved. Anyone waiting for the cutting cycle to bring back a cheaper mortgage has been watching the wrong line.

The cuts do reach one set of rates quickly: the ones savers earn. Money market funds, high-yield savings accounts, and Treasury bills track the policy rate down almost immediately. The result is a squeeze from both directions at once. Cash pays less every quarter, and borrowing costs what it did when the cutting started.

What 70 years of the chart shows

Out of 203 major cutting windows since 1954, the 10-year rose in only 15 percent, and those cluster in one era: the mid-1970s, when bond investors doubted that inflation was beaten and refused to follow the central bank down. The recent data gives today's investors similar reasons for doubt. Consumer prices were rising at better than 4 percent through this spring, and a 10-year note near 4.6 percent against 4 percent inflation is not a generous offer.

The long view also corrects a common intuition about the level of rates. The median federal funds rate since 1954 is 4.27 percent, so today's 3.63 sits below the historical middle. What makes the present feel expensive is the comparison everyone carries: the 85 consecutive months the rate spent pinned under a quarter of a percent after the financial crisis. On a 70-year chart, that floor is the anomaly, stranger than the 19.1 percent peak of June 1981. The 2022 tightening that ended it, from 0.20 percent in March 2022 to 5.12 by July 2023, was the fastest 16-month climb since the Volcker years.

What to watch

The 10-year will deliver the usual relief when the market believes one of two things: that inflation is durably back near target, or that the supply of new Treasury debt is shrinking. Neither belief holds today. Inflation has been running above 4 percent, and the federal interest bill is compounding at a pace near $1.35 trillion a year, which requires ever more issuance for the market to absorb. Until one of those lines bends, the price of a mortgage belongs to the bond market, not the Fed.

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