Understanding Interest Rates: Why Fed Rate Cuts Aren’t the Primary Driver—and Why That Matters
- Rich Arzaga
- 6 days ago
- 6 min read
by Rich Arzaga, CFP®, CCIM, The Real Estate Whisperer® Financial Planning
Interest rates touch almost every area of personal financial planning and rental property ownership. They influence cash flow, borrowing decisions, and ultimately the sustainability of a long-term plan. Used thoughtfully, debt can support good outcomes. Over-relied upon—or misunderstood—it can quietly introduce risk into an otherwise sound financial plan or healthy rental investment.
I’ve seen this firsthand. During 2008 and 2009, I watched a single, small investor lose more than 50 single-family and multi-plex rentals in central California. The properties themselves weren’t inherently bad. The strategy was. It relied too heavily on debt, repeated refinancing, and the assumption that housing values would continue to rise. When those assumptions failed, the entire structure collapsed.
Debt doesn’t usually fail on its own. It fails when assumptions fail.
Most of the families I work with today are ages 50 or older. They often still carry mortgage debt, either because they are finishing the final years of a primary home loan or because they intentionally use debt to leverage income-producing real estate. Unlike younger households, they are typically less impacted by revolving debt, such as credit cards or auto loans. For them, interest rates matter most where the numbers are large, the timelines are long, and the consequences are meaningful.
For households in their 50s and beyond, interest rates matter most where the numbers are largest, the timelines are most extended, and the margin for error is smallest.
The more critical question for these families is not “Where are rates going next?” but rather “What role does debt play in achieving our overall financial goals?” Closely behind that is an equally important question: Do we actually understand how interest rates work—and how they behave under different conditions? That understanding can be the difference between financial confidence and financial stress during the retirement years.
Going deep on this topic can feel overwhelming. A proper technical understanding of interest rates is something finance students spend years developing. But that doesn’t mean individuals and families need to master every detail to make good decisions. Like many complex topics in financial planning, it’s best approached gradually—one concept at a time.
So let’s start with the most common question people ask, or sometimes don’t ask out loud:
What actually impacts interest rates?
This is often confused with a related—but very different—question: Why doesn’t the Federal Reserve cut rates more aggressively?
As you’ll see, Federal Reserve rate decisions often take a back seat to other, more powerful drivers of long-term interest rates.
What an Interest Rate Really Represents
Before talking about what moves interest rates, it helps to clarify what an interest rate actually is.
When someone takes out a mortgage—especially a 30-year mortgage—they are not just borrowing money from a bank and paying it back over time. That loan is typically packaged and sold to investors in the broader financial markets. In practical terms, a mortgage is a long-term investment that someone else agrees to hold for decades.
From the investor’s perspective, the interest rate is compensation for several very real risks:
How much inflation will erode purchasing power over time?
Whether the loan will be repaid as promised
Whether the borrower will refinance or pay it off early
How uncertain the economic environment may be
The interest rate on a mortgage is the market’s way of pricing those risks.
This explains why mortgage rates behave differently from short-term rates you hear about in the news. The Federal Reserve influences overnight and short-term borrowing costs.
Mortgage rates, by contrast, reflect long-term expectations about inflation, economic stability, and risk. Investors set them, not directly by the Fed.
Myth: “When the Fed Cuts Rates, Mortgage Rates Fall”
This is one of the most common—and understandable—assumptions people make. It’s repeated in headlines and reinforced in casual conversation. But it’s only partially true, and often misleading.
The Federal Reserve sets a short-term, overnight rate. A 30-year mortgage, however, is priced by investors who care about what may happen over decades, not months.
The Fed controls overnight money. Mortgage rates price decades of risk.
This is why we frequently see outcomes that feel confusing:
The Fed cuts rates, but mortgage rates barely move.
The Fed cuts rates, and mortgage rates rise.
The Fed signals future cuts, and mortgage rates have already moved weeks earlier.
Mortgage rates don’t respond to Fed actions themselves. They react to what those actions signal about long-term inflation, economic growth, and uncertainty.
If investors remain concerned about inflation or broader risks, mortgage rates can stay elevated even during easing cycles.
Federal Reserve policy influences mortgage rates indirectly—not systematically.
A Real-World Example: When the Expected Drop Never Came
Over the past few years, many homeowners and real estate investors delayed decisions while waiting for interest rates to come down. The logic felt sound: inflation appeared to ease, the Fed signaled future cuts, and conventional wisdom suggested mortgage rates would soon follow.
But for many, that drop never arrived.
Even as short-term rates stabilized or declined, mortgage rates remained stubbornly high—and at times increased. For borrowers planning to refinance, purchase, or restructure debt, this had real consequences: higher ongoing payments, delayed transactions, and missed opportunities.
Behind the scenes, investors remained focused on long-term inflation risks, heavy government borrowing, and economic uncertainty. The return they required to hold 30-year mortgage debt stayed elevated.
Waiting for a single event—like a Fed rate cut—can be a risky strategy when dealing with long-term debt. If a purchase or refinance works at today’s rate and supports long-term cash flow, waiting for “perfect” rates may introduce more risk than moving forward. Rates can be refinanced. Time, opportunity, and cash flow often cannot.
The Three Core Forces That Drive Mortgage Rates
Despite the noise in headlines, mortgage rates are largely shaped by a small number of underlying forces.
Headlines do not influence mortgage rates. They are driven by inflation expectations, long-term yields, and risk.
1. Inflation Expectations
Investors care far more about future inflation than today’s data. If inflation is expected to remain elevated or unpredictable over decades, mortgage rates stay higher to protect purchasing power.
2. Long-Term Interest Rates (The 10-Year Treasury)
The 10-year U.S. Treasury yield serves as a key benchmark for long-term borrowing. Mortgage rates tend to move in the same general direction, reflecting market expectations—not just Federal Reserve policy.
3. The Mortgage Risk Premium (The “Spread”)
Mortgage rates include an additional premium above Treasury yields to compensate investors for:
Credit risk: the chance that borrowers don’t repay as promised
Prepayment risk: when falling rates lead to early payoff and lost returns
Liquidity and market risk: capital tied up while other opportunities arise
When uncertainty rises, this spread widens—keeping mortgage rates elevated even if Treasury yields decline.
A Better Takeaway: Plan for Rates, Don’t Predict Them
Interest rates are one of the most influential—and misunderstood—inputs in financial planning and rental property ownership. Too often, they are treated as something to predict rather than something to plan for.
Mortgage rates are not broken. They are doing exactly what markets do: pricing long-term risk.
For individuals and families—especially those in their 50s and beyond—the objective isn’t perfect timing. It’s understanding how debt fits into the broader plan:
Does it support sustainable cash flow?
Is it resilient if rates stay higher for longer?
Does it align with long-term goals rather than short-term optimism?
Good financial planning doesn’t require getting interest rates right. It requires building plans that work even when rates don’t cooperate.
The real advantage isn’t predicting where rates will go next. It’s knowing how your plan performs if they don’t go where you hoped.
Borrower Takeaway Box
How to Think About Interest Rates
Interest rates matter—but not in the way most headlines suggest.
Mortgage rates are not set by a single Federal Reserve decision or a news cycle. They are shaped by long-term inflation expectations, market risk, and investor demand over decades.
Rather than trying to predict where rates will go next, a more effective approach is to plan how debt fits into your overall financial picture.
Good planning asks:
Does this debt support sustainable cash flow?
Is the plan resilient if rates stay higher for longer?
Does leverage align with long-term goals—not short-term expectations?
The goal isn’t perfect timing. It’s a plan that works across different interest-rate environments.
Written by Rich Arzaga, CFP®, CCIM, Founder, The Real Estate Whisperer® Financial Planning. Helping clients and advisors integrate real estate into holistic financial plans.
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