Oil prices temporarily retreated earlier this summer as a ceasefire with Iran allowed oil to begin flowing through the Strait of Hormuz at the same time the United States began an historic release of oil from our Strategic Petroleum Reserve. As conflict has resurfaced in the Strait of Hormuz beginning in July, oil prices have jumped off of their lows and are now closing in on $100 per barrel. So has the cost of a mortgage. Since early July the average 30-year mortgage rate has climbed 23 basis points, from 6.43% to 6.66%. Over that same stretch the 10-year Treasury yield rose 20 basis points, and it has kept climbing since, reaching 4.84% on September 9 for a total move of 36 basis points. The fed funds rate did not move at all; it sat at 3.63% the entire time.
You might be especially confused considering in July the Federal Reserve Open Market Committee held a meeting with new Fed Chair Kevin Warsh, and the Fed did not cut, did not hike, it held rates flat. And yet the average 30-year mortgage and 10-year Treasury yields have increased since the meeting. Why is that?
I have a lot of clients, colleagues and competitors who sometimes wonder why interest rates behave the way that they do. If the Fed has not acted, why did your mortgage rate change anyway? Or more practically, should you wait to buy your house until after the Fed cuts rates, because you believe that they will and you want that reflected in the mortgage you are planning to take out?
Here’s the punchline: the Fed doesn’t set your mortgage rate.
The Fed controls only one specific interest rate, which is the rate that banks charge each other overnight. That is it. Everything else, the 10-year Treasury, your mortgage, your car loan, gets priced by the market, and the market does not wait for a meeting to move. At its core the 10-year Treasury yield should reflect market expectations of two components for the next decade: inflation and growth.
Ordinarily the volatility of commodities like oil is such that the Fed prefers to look at inflation excluding their price movement in an attempt to look at “core” inflation. But when oil increases from $60 to $100, the impact is not contained to the pump. Oil is an input cost in freight and manufacturing; petrochemical byproducts are in the plastic packaging on everything you buy at the grocery store. A brief spike fades before it works through any of that like a firework in the sky. An elevated level of oil near $100 burns hot through the economy like a well set bed of embers. That distinction, transitory versus sustained, is what determines whether an oil shock stays a bond market story or becomes a Fed story. I will come back to that later.
For now, let us address the main topic: who actually sets the interest rates you pay, and why do they seem to move on their own?
I will start with the mechanics, because most of the confusion clears up once you see how the Fed actually does its job.
The Federal Reserve targets a specific rate called the federal funds rate. This is the rate banks charge each other for overnight loans. Banks are required to hold a certain amount of reserves, and on any given night some have more than they need while others have less. The Fed does not set this rate by decree. It sets a target range and then uses two tools to keep the actual rate inside that range: interest on reserve balances (what it pays banks to simply hold reserves with the Fed, which sets a floor) and the overnight reverse repo facility (which lets a wider set of institutions park cash overnight, reinforcing that same floor). Adjust those two levers, and the fed funds rate falls in line.
That is it. That is the entire mechanism. The Fed is not setting mortgage rates, auto loan rates, or credit card rates directly. It is targeting one specific overnight rate between banks.
This is where the short end and long end split apart, and it is the single most useful distinction in this whole paper. There is not just one Treasury rate. There are an almost infinite number based upon the time to maturity of the loans made to the federal government.
Source: Bloomberg, US Treasury Actives Curve (I25), mid yield to maturity, September 9, 2026. Maturity axis is scaled to keep the short end legible without letting the first year dominate the chart.
The short end is what the Fed controls directly. Fed funds, and by close relation, other very short-term rates.
The long end is set by the market. The 10-year Treasury yield, mortgage rates, most corporate bond yields, these are priced by whoever is buying and selling those securities every day, based on their own expectations for growth, inflation, and risk. The Fed does not set the 10-year yield. While it can influence it, it cannot control it.
Why does this matter to you? Because almost every rate that actually touches your life, mortgage, auto loan, savings account yield, business loan, has its own pricing dynamics and it is worthwhile to understand what drives those rates to be an informed consumer.
The core concept of this paper is to understand what the Fed influences directly, then understand what the market sets on the long end. Plenty of people spend enormous energy trying to predict the Fed’s next move. I would argue that is mostly wasted effort. The Fed will do what it does, and by the time it acts, the long end has usually already moved. If you are going to spend energy understanding rates, spend it on the part of the curve that is actually pricing your mortgage.
If the market sets the long end, what are they basing it on? Buying and selling a house is something most people pick up along the way. You want to buy a 3,000 square foot house, what do you pay for it? Imagine your realtor knows that the 2,750 square foot house next door sold six months ago for $600,000, and the house you want to buy is in similar shape. You compare the price of the comparable to the square footage and know that you are probably going to need to pay at least $218 per foot ($600,000 divided by 2,750) because the seller knows this too. Where you ultimately land is the free market. You might be a great negotiator and pay $215 per foot, or there may be reasons why you have to pay $300 per foot.
A house is highly specific and trades infrequently. Treasury bonds, on the other hand, are pretty commodity like and trade a lot, providing efficient real time price discovery. But just because you know where the market is does not mean that it is right and rational, and many market participants take a view on where it should be, not just where it is. So how does a fundamental investor assess what rates should be?
Let me take them one at a time.
Congress charges the Fed with two primary jobs: promote maximum employment, and maintain stable prices. This is what is commonly referred to as their dual mandate. Most of the time those goals point the same direction. It is unlikely that you would see inflationary pressures in a recession or deflationary pressures during a roaring economy.
Cutting rates supports the economy and employment. Raising rates cools inflation. When inflation is high and employment is strong, the choice is easy. When both inflation and unemployment are moving the wrong way, there is no clean answer, only a judgment call about which risk matters more.
To understand where we sit, you have to look at both halves.
My favorite inflation chart has nothing to do with the CPI release. It is the price of a Big Mac.
Source: The Economist Big Mac Index (raw USD series); U.S. Bureau of Labor Statistics via FRED (CPIAUCSL). Indexed from April 2000 = $2.24.
I am not suggesting the CPI is wrong. The two measures are built to do different things. CPI tracks a broad basket across housing, healthcare, transportation, and much more, weighted by what people actually spend. A Big Mac is one product with its own labor costs, beef prices, real estate, and franchise economics. But the gap is a useful reminder that “inflation” is an average, and the things you notice most, food, rent, insurance, tuition, often run hotter than the average.
Now the official numbers. Inflation peaked at 9.0% in June 2022, the highest reading in forty years. Core inflation, which strips out food and energy, peaked at 6.6% in September 2022. By late 2025 both had come most of the way back down, running in the mid 2% range.
Then something interesting happened this year. Headline inflation reaccelerated, hitting 4.2% in May 2026 before easing to 3.3% in July. Core inflation barely moved, sitting at 2.5% in July. That divergence is the entire oil story in one data point.
Source: U.S. Bureau of Labor Statistics via FRED (CPIAUCSL, CPILFESL), seasonally adjusted, monthly through July 2026.
Break the headline number into its pieces and it becomes obvious where the pressure is coming from. The chart below splits year over year headline inflation into the four buckets that make it up, so the height of each bar is the headline rate and each colored block is how much that category contributed to it.
Source: Bloomberg calculation using U.S. Bureau of Labor Statistics data. Contributions to year over year headline CPI, not seasonally adjusted, October 2025 unavailable.
Energy is roughly 6% of the basket. It is currently contributing about 0.95 of the 3.4 percentage points of headline inflation, which is to say something like a quarter of the total is coming from one twentieth of the basket.
The swing is the part worth studying. Through the spring of 2025 energy was actually subtracting from inflation, pulling the headline rate down by as much as a quarter of a point. By May of this year it was adding a point and a half. Meanwhile core services, which is about 60% of the basket, has been grinding steadily lower the entire time. The reacceleration in headline inflation this year is almost entirely an energy story, which is precisely why the gap between headline at 3.3% and core at 2.5% has opened back up.
Which brings us back to the fireworks versus embers metaphor. Energy is in the headline number and excluded from core, so the Fed can reasonably look through it. But if oil stays near $100 rather than retreating, it stops being contained. Freight costs rise, manufacturing input costs rise, and eventually those costs show up in the price of goods and services that are in the core basket. That transmission takes quarters, not weeks. As disappointing as it may be, it is true that only time will tell what impact this conflict will have on core inflation.
As for now, core inflation is firmly above the Fed’s stated objective of 2%, which indicates that for the price stability mandate they may need to consider raising rates.
The other half of the mandate. Unemployment bottomed at 3.4% in early 2023, about as tight as the labor market has ever been. It drifted up through 2025 and into early 2026, peaking at 4.4% in February. Since then, it has actually improved, falling to 4.1% by August 2026. U-6, the broader measure that includes people working part time because they cannot find full-time work plus those marginally attached to the labor force, sits at 7.7%.
Source: U.S. Bureau of Labor Statistics via FRED (UNRATE, U6RATE), seasonally adjusted, monthly through August 2026. U-6 begins 1994.
While we have not seen sustained job growth above 100,000 per month, the overall employment situation is holding in there. Over the last twelve months we have averaged 50,000 jobs added per month, though that figure masks real volatility as four of those twelve months were negative, and monthly prints ranged from a loss of 156,000 to a gain of 214,000. More recently the trend has improved, with the last six months averaging roughly 107,000 and August coming in at 162,000. This gives the Fed some breathing room on the employment mandate.
Put the two halves together and you can see why this is genuinely hard right now. We have an improving but fragile labor market coupled with sticky inflation and inflationary pressures from elevated oil prices.
If inflation is at 9% and employment is rock solid, the Fed is hiking rates. If unemployment is spiking and inflation is at 2%, the Fed is cutting aggressively. Today is neither, and the right answer depends on which risk you weigh more heavily. Reasonable people at the same table disagree.
This is also why I said earlier that predicting the Fed is mostly wasted effort. There is not a clean answer sitting in the data waiting to be found.
Now for the part that actually sets your mortgage.
The long end should, over time, track nominal GDP growth, which is a function of real growth plus inflation. The logic is straightforward. If the economy is growing at 5% in nominal terms, capital should be able to earn something in that neighborhood, and lenders should demand roughly that much to part with their money for a decade.
Over the last 30-years real GDP grew approximately 2.4%. The market is currently ascribing a view that inflation will average 2.4% over the next decade as determined by analyzing Treasury Inflation Protected Securities (“TIPS”), more on this below. Put the two together and the fair value of the 10-year Treasury is roughly 4.8%. As of September 9 the 10-year Treasury is at 4.84%.
So the 10-year is sitting within a few basis points of that estimate. By the simplest version of the fair value framework, long rates are neither cheap nor expensive right now. They are close to exactly where the fundamentals say they should be.
That surprises people who feel like rates are punishingly high, and it is worth sitting with. Rates feel high because we spent a decade near zero. Measured against the actual growth rate of the economy, 4.84% is not an outlier.
The nominal growth framework is incomplete, though. The 10-year yield is not only a forecast of growth and inflation. It also includes compensation for the risk that the forecast is wrong.
Think about it from a lender’s perspective. If you lend money for ten years at a fixed rate, you are exposed to a decade of things you cannot see coming (an inflation surprise, a fiscal shock, a geopolitical event, or an economic calamity). A reasonable lender would want to be paid something extra for that uncertainty, above and beyond their best guess about where short rates will average out. That extra compensation is called the term premium.
The New York Fed publishes a model that splits the 10-year yield into these two pieces: the risk neutral yield (what the market expects short rates to average) and the term premium (the extra compensation on top).
Source: Federal Reserve Bank of New York, Adrian-Crump-Moench (ACM) term structure model, monthly through August 2026. Term premium was persistently negative from roughly 2012 to 2021.
As of August 2026, that model puts the term premium at 0.76%, with the risk neutral component at 4.05%. For context, the term premium averaged 1.34% from 1990 through 2019.
Term premium is not elevated by historical standards. It is roughly half a point below its long run average. The rise in long rates since 2021 has come mostly from the market repricing where short rates will average over the next decade, not from investors demanding more compensation for uncertainty.
That said, the term premium is the piece that moves on news like a conflict in the Strait of Hormuz. It rose from 0.51% in June to 0.84% in July before easing slightly in August. That is a real move, and it happened without the Fed doing anything, which is exactly the mechanism this paper is about.
One last cut of the same number, and it is the most useful one for judging whether rates are actually restrictive.
Any nominal yield, as we discussed above, contains two things: the inflation the market expects, and the real return demanded on top of it. The Treasury issues inflation protected securities (TIPS), and the difference between a regular 10-year yield and a 10-year TIPS yield tells you what inflation rate the market is pricing over that decade. That difference is called the breakeven.
As of September 9, 2026, the 10-year breakeven is 2.38%. With the 10-year nominal yield at 4.84%, that implies a real yield of roughly 2.5%.
Source: Bloomberg. 10-year breakeven (USGGBE10) daily; 10-year nominal yield (USGG10YR) weekly, with the September 9, 2026 Treasury active curve point appended. Real yield = nominal less breakeven.
Two things are worth noting. First, the market expects inflation to average 2.38% over the next decade, which is only modestly above the Fed’s 2% target and well below where headline inflation sits today. The bond market is, in effect, pricing today’s energy spike as temporary. Second, a real yield above 2% is restrictive by post 2008 standards, when real yields spent years near or below zero.
So which is it? Are rates high or not? Against nominal growth, they look fine. Against the last fifteen years of experience, they look high. Either way, the fundamentals suggest that current levels are roughly in line with an academic view of fair value.
Between 2022 and 2023 the Fed raised rates by more than five percentage points, the fastest hiking cycle in forty years, and it has since cut about 1.70 percentage points off of that peak, for a net increase of about 3.55 percentage points. How did that impact you?
The answer is pretty simple: what rate is your loan actually priced off of?
Think about an electric bill. If you are on a variable rate plan, a move in natural gas prices shows up on your next statement whether you like it or not. If you signed a three-year fixed plan, that same move means nothing to you until your contract expires.
Credit works the same way. Some loans are contractually tied to a rate the Fed effectively controls. Some are priced off the long end of the Treasury curve. Some are locked at origination and do not move at all until you go back to the market. Let us explore how various loans are typically priced and how they behave when interest rates change.
The majority of small business credit in this country is priced off the bank prime rate. Prime is not technically set by the Fed, but it basically behaves like it is. Banks set prime at a fixed spread over the top of the Fed’s target range, currently 3.00% above it. When the Fed moves, prime moves, usually the same day.
Watch how tightly that holds. Prime bottomed at 3.25% in 2021, peaked at 8.50% across 2023 and 2024, and sits at 6.75% today. That is a 5.25-point increase followed by a 1.75-point decline. Now compare it to the Fed’s own path over the same period: up roughly 5.25 points, then down roughly 1.70 points. Prime tracked the Fed almost perfectly, because that is exactly what it is designed to do.
Source: Federal Reserve via FRED (DPRIME); Bloomberg (FEDL01). Through September 2026.
So, if you own a business with a prime based line of credit, you are the borrower who feels Fed policy most directly and most immediately. There is no refinancing decision to make, no negotiation to have, and no lag to wait out. The Fed hikes, and your interest expense is higher on next month’s statement.
The borrower most exposed to the Federal Reserve is not the homeowner with the 30-year mortgage. It is the business owner with a working capital line.
Credit cards are also prime based, but with a wide margin stacked on top and considerably more pricing discretion left to the issuer.
The average rate across all credit card accounts went from 14.51% in late 2021 to a peak of 21.76% in August 2024. That is a 7.25-point increase, which is more than the Fed’s own 5.25 point move over the same stretch. Then the Fed started cutting. As of May 2026, with the Fed sitting roughly 1.70 points below its peak, the average credit card rate had come down to 20.94%. That is a decline of 0.82 points, or less than half of what the Fed delivered.
Source: Federal Reserve G.19 via FRED (TERMCBCCALLNS), all accounts, quarterly, not seasonally adjusted. Bloomberg (FEDL01). Through May 2026.
Transmission runs in one direction faster than the other. Rates on revolving consumer credit rise readily when the Fed hikes and come down grudgingly when the Fed cuts. I am not going to speculate on why that is, the data is simply what it is. But the practical implication for anyone carrying a balance is worth stating plainly: waiting on Fed cuts is not a plan for fixing your credit card rate.
Auto loans are fixed at origination, so existing borrowers are fully insulated. Your payment does not change because the Fed did something.
The catch is that auto loans are short, typically five to six years, and most people trade in well before payoff. So the pool of borrowers being repriced into current market rates turns over quickly. The average 48-month new car loan rate went from 4.58% in late 2021 to a peak of 8.65% in May 2024, and has eased back to 7.47%.
Source: Federal Reserve G.19 via FRED (TERMCBAUTO48NS), quarterly, not seasonally adjusted. Through May 2026.
Now to the main event, and the reason this paper is titled the way it is.
Thirty-year mortgages are fixed and they are long, which makes existing homeowners the most insulated borrowers in this entire section. If you locked in a 2.65% mortgage in 2021, the last four years of Federal Reserve policy have been a spectator sport for you.
But what about a new borrower? What actually determines the rate you would be quoted today? Not the Fed. Here is the evidence.
I pulled weekly data from Bloomberg on the 30-year mortgage rate, the fed funds rate, and the 10-year Treasury yield going back to 1990, which gives 1,911 weekly observations. Rather than compare levels, which tend to look correlated simply because everything drifts together over long periods, I looked at whether week to week changes in the mortgage rate line up with week-to-week changes in each of the other two.
An R² of 0.001 means that changes in fed funds explain essentially none of the week-to-week movement in mortgage rates. Statistically speaking, it is noise. We believe the 10-year Treasury explains a real and meaningful portion.
Source: Bloomberg (NMCMFR30, FEDL01, USGG10YR), weekly, January 1990 through August 2026, 1,911 observations. R2 from linear regression of weekly changes.
If you would rather see the same conclusion without the statistics, look at the spreads instead. The spread between the 30-year mortgage and the 10-year Treasury has been held in a fairly tight band, mostly between one and two percentage points, for thirty-five years running. The spread between the mortgage rate and fed funds swung from under one point to over six points, depending entirely on where the Fed happened to be in its cycle at the time.
Source: Bloomberg (NMCMFR30, FEDL01, USGG10YR), weekly, 1990 through August 2026.
One of those spreads is stable because it reflects a genuine pricing relationship. The other is all over the map because there is not one.
And if you want a single episode that makes the point better than any statistic, look at late 2018 into the middle of 2019:
During that window, the Fed did not cut rates once; it actually hiked in December 2018. Yet over those eight months the average 30-year mortgage rate fell more than a full percentage point, from 4.83% to 3.75%, tracking the 10-year Treasury as it declined from 3.13% to 2.14%. The Fed’s first cut of that cycle did not come until July 2019, after the mortgage market had already moved.
Which brings me back to the question I asked at the beginning of this paper. Should you wait to buy a house until after the Fed cuts rates? If your reasoning is that a Fed cut will bring your mortgage rate down with it, the historical record does not support that assumption. Mortgage rates follow the 10-year Treasury, and the 10-year moves on expectations for growth and inflation, frequently well before the Fed acts and occasionally in the opposite direction entirely.
At the far end of the spectrum sit the largest borrowers in the market, and they have a luxury that nobody above them in this section has. They decide when to borrow.
A large investment grade company does not have a rate imposed upon it. It issues bonds when it determines conditions are acceptable, at a fixed coupon, for a maturity of its own choosing. As of September 8, investment grade corporate yields are approximately 5.56% and high yield is approximately 7.39%.
Source: Bloomberg US Corporate Investment Grade (LUACYW) and US Corporate High Yield (LF98YW) yield to worst, monthly, 1990 through September 2026.
Source: Bloomberg fixed income database, USD-denominated US investment-grade corporate issuance aggregated by issue date. 2026 through September 8. Totals may differ from other league table providers.
While refinancing certainly makes up a portion, a great deal of it is capital spending led by the hyperscalers building out data center capacity. They are the clearest example of a borrower that is close to price insensitive. When you believe the return on a project justifies the investment, paying a 5% coupon instead of a 4% coupon changes the math at the margin but it does not change the decision. These companies are issuing debt because they have somewhere productive to put the money, not because rates look attractive.
The borrowers with the least capacity to absorb a rate shock, which is to say small businesses and households carrying revolving balances, are the ones most directly and immediately exposed to Federal Reserve policy. The borrowers with the most cushion either hold fixed rate debt or have the ability to pick their moment entirely.
That is not a coincidence, and it is not anybody being unfair. Floating rate, prime based credit is simply what is available to borrowers who do not have the scale or the credit quality to access fixed rate term markets on attractive terms. The structure of the credit market means that interest rate volatility lands hardest on precisely the balance sheets least equipped to absorb it.
Let me go back to where I started. Oil is closing in on $100. The 30-year mortgage rate has climbed 23 basis points since early July. The 10-year Treasury has risen 36. The Fed has not moved at all, and it held rates flat at its July meeting.
If you have read this far, none of that should look strange anymore. The Fed sets the overnight rate. The market sets everything past that, and it prices growth, inflation, and uncertainty in real time. When a shipping lane in the Strait of Hormuz becomes a question mark, the bond market repriced the same week. It did not wait for a press conference.
You can see it in the term premium, which is the piece of the 10-year yield that exists specifically to compensate lenders for the things nobody can forecast. It went from 0.51% in June to 0.84% in July. That is the market charging more for uncertainty, and it happened while the Fed sat still.
So what actually matters from here? Not the direction of the shock. The direction is already priced. What matters is the duration.
This is the fireworks and embers distinction, and it is worth being precise about what each scenario looks like. If this proves to be a short-lived spike and oil retreats back toward $70, energy falls out of the year over year comparisons within a few months. Headline inflation converges back down toward core, the term premium likely gives back what it added, and this episode becomes a footnote. The Fed looks through it entirely because there is nothing left to look at.
If oil instead settles in near $100 for several quarters, the arithmetic changes. Energy stops being a headline story and starts becoming a cost story. Freight repricing, manufacturing inputs, and petrochemical feedstocks work their way into the price of goods and services that sit squarely inside the core basket. That transmission takes quarters, which is precisely why it is not visible in the data yet. And at that point the Fed cannot look through it, because it is no longer in the part of the data the Fed excludes.
Today the market is telling you which of those it expects. The 10-year breakeven is 2.38%, meaning bond investors are pricing average inflation of about 2.4% over the next decade. That is a market betting on fireworks, not embers. Core inflation at 2.5% is above the Fed’s target, but it has been stable rather than accelerating, which is consistent with that view.
I have no idea if the market is right or wrong. Knowing where the market is and knowing where it should be are two different exercises. The market has been wrong about inflation before, in both directions, and often spectacularly. But it is worth knowing what is priced, because that is the bet embedded in every fixed rate loan and every bond portfolio, including yours.
Watching the Fed will tell you very little about the rate on your mortgage. Watching oil, growth, and inflation expectations will tell you a great deal.
Those are the inputs the long end is actually pricing. The Fed will meet again, and it will do whatever it does. The 10-year Treasury will have already moved.
If any of this raises questions about how your own fixed income is positioned, that is exactly the conversation to have with your advisor. That is what we are here for.
This material is provided by 1900 Wealth Management, LLC for informational and educational purposes only and represents the views and opinions of the author as of the date of publication. It does not constitute investment, legal, or tax advice, nor an offer or solicitation to buy or sell any security or to adopt any investment strategy. 1900 Wealth Management, LLC is a registered investment adviser registered. Registration does not imply a certain level of skill or training. Statements regarding future economic conditions, interest rates, inflation, and monetary policy are inherently uncertain and subject to change; actual results may differ materially. References to fair value reflect a simplified analytical framework and should not be interpreted as a forecast or price target. Index and market data are shown gross of fees and do not reflect the deduction of advisory fees, transaction costs, or other expenses; indices are unmanaged and cannot be invested in directly. Past performance is not indicative of, and does not guarantee, future results. All investing involves risk, including the possible loss of principal. Data sourced from Bloomberg, the Federal Reserve Bank of New York, the U.S. Bureau of Labor Statistics, the U.S. Bureau of Economic Analysis via FRED, and The Economist, as of September 2026 unless otherwise noted. Third-party data are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Charts and exhibits are for illustrative purposes only. Please consult your 1900 Wealth advisor before making any investment decision.
For informational purposes only. Not investment advice. See disclosures.
Bobby serves as Chief Investment Officer at 1900 Wealth Management, where he manages a team of investment officers and oversees portfolio strategies for clients. He also develops new business relationships and contributes to firm growth.
A Chartered Financial Analyst (CFA), Bobby previously analyzed fixed-income investments for USAA and its related funds. His career spans capital management, private equity, and financial operations in multiple industries.
Bobby holds a Bachelor of Business Administration in Accounting and Finance from Texas Christian University.
