Does the Federal Reserve Impact Mortgage Rates?

Before we answer that, we should define exactly what the Federal Reserve is and what it does.  The Federal Reserve (The Fed) is the nation’s central bank and is tasked with guiding the economy to achieve low inflation and high job growth. The Fed does that by managing the supply of money and the cost of credit – mostly with its primary tool, the federal funds rate.

The Fed will reduce interest rates when the economy slows down to encourage companies and people to invest and spend.  The Fed will also increase rates when prices are rising to slow growth and curb inflation. When the Fed raises the federal funds rate, it becomes more expensive for banks to borrow money, and these increased costs are passed on to consumers and businesses through higher interest rates on short-term loans like home equity lines of credit, car, unsecured and commercial loans.

The Fed influences mortgage rates indirectly by setting the federal funds rate, which affects the yield on the 10-year Treasury note, the interest rate that the U.S. government pays to issue debt over 10 years. As a long-duration loan, mortgage rates are primarily benchmarked to the 10-year Treasury note, which has a duration close to the average mortgage. Therefore, movement in the 10-year Treasury has a significantly larger and more direct impact on mortgage rates than the federal funds rate. A complex mix of factors helps determine 10-year yields, including economic growth forecasts, inflation, demographics, and U.S. fiscal deficits.

Analysts caution that the expected cut in the Federal Funds Rate does not guarantee a drop in mortgage rates. Homebuyers and owners looking to refinance may have to wait for interest rates on 30-year mortgages to fall.  That’s because rates on a 30-year mortgage are based heavily on investors' expectations of the economy and inflation over the next decade, not on the Fed’s near-term actions.

For the foreseeable future, mortgage rates could stay pretty close to where they are. Mortgage rates could even rise if tariffs end up pushing up inflation substantially.

Is now a good time for you to buy or refinance a home?  Contact one of our mortgage lending experts for answers to these and any home financing questions you may have.  We also invite you to visit our mortgage resource center for tips on improving your credit score, saving for a down payment, understanding your loan estimate and more.