THE FED VS. YOUR LOAN

August 29, 2025 | AgFocus-Ag Focus | BusinessFocus-Business Focus

Interest rates are always moving, and while the Fed plays an important role, the impact on everyday loans isn’t always straightforward. That’s why we encourage our customers not to make decisions based on news alone, but to let us help you sort through what makes the most sense for your situation.

THE FED VS. YOUR LOAN: WHY INTEREST RATE CUTS DON’T ALWAYS MEAN CHEAPER BORROWING

By: Lee Potts | Vice President/Senior Credit Officer

 

Interest rates have been a popular topic of discussion since they began climbing from historic lows starting in early 2022. Prior to that time, rates as a whole declined to historic lows as an after-effect of the covid pandemic and greatly impacted the economy.

Now there is talk about the possibility of the Federal Reserve decreasing rates in September. What does it mean when the Fed lowers rates, and how does that translate to everyday loans for vehicles, houses, commercial property, or other similar types of financing?

 

First, we need to remember what happens when the Fed moves rates. Interest rates affected are primarily the Fed Funds Target Rate, which is the interest rate at which banks lend reserve balances to other banks overnight. This rate is determined by the Federal Open Market Committee, (FOMC) which meets every six weeks.

 These changes also affect the Prime rate of interest, which is defined as the interest rate that is the benchmark for banks and other lenders to be used as a basis of interest rates for various types of loans such as credit cards or other types of variable rate loans.

So if the Fed lowers rates, does that mean that interest rates on home and auto loans will go down? As Lee Corso would say, “not so fast my friends”! So, what are those interest rates based on?

Long-term loans such as residential mortgages bear interest rates that are based on the 10-Year Treasury rate with adjustments added by lenders to account for risk and overhead.

What affects 10-Year Treasury rates? These rates are determined each day in the market by investors who evaluate various elements of the economy such as inflation expectations, economic health (or lack thereof), supply/demand for treasury bonds, and simply investor sentiment on any given day just like in other markets based on various data in similar fashion to stocks and commodities. In other words, the Fed has no direct control over long-term rates such as the 5-Year or 10-Year Treasuries as
just a couple examples.

What does this mean for your vehicle or mortgage loan rates? The underlying point is that it would not make sense to base the decision of whether to buy a vehicle or house or refinance your house strictly on what the Fed does with interest rates. It is not an “apples to apples” comparison.

For example, from September 1, 2024 to March 1, 2025, the Fed decreased the Fed Funds rate approximately one full percentage point. During that same period of time, the 10-year treasury actually increased one half of a percentage point. Thus, during that same time when Fed Funds (short-term) rates decreased substantially, long-term rates actually moved in the opposite direction in the market.

If you have had thoughts of whether to refinance your mortgage, don’t hesitate to give one of our residential lenders a call to explore options and determine whether it is feasible!