Cynthia (my preferred lender for anyone here who is looking to buy) and I were speaking the other day about how there is a lot of confusion surrounding the Fed Rate and Mortgage rates. I asked her to break it down for everyone… I hope this helps.
If you’ve ever heard the news say “The Fed just lowered rates!” and wondered what that means for mortgage rates, you are not alone. Many people assume that when the Federal Reserve changes its rate, mortgage interest rates move in lockstep or follow in some way — but that’s unfortunately not how it works. Any time the headlines start reporting on the Fed Rate, I get hit with people asking about what the change will mean for mortgage rates.
Let’s break it down.
What Is the Fed Rate and What Makes It Change?
The “Fed rate” refers to the Federal Funds Rate, which is the interest rate that banks pay to borrow from each other or from the federal government overnight or in the very short term. “The Fed” refers to the Chair (Jerome Powell) and the Board of Governors of the U.S. Federal Reserve. Simply put, the Fed adjusts the Fed Rate to manipulate/help control federal inflation, employment, and economic growth. This rate serves as a benchmark for things like:
- Credit card APRs
- Auto loans
- Personal loans
- Home equity lines of credit (HELOCs)
So, What Makes Mortgage Rates Change?
Mortgage rates are based on a completely different market: the bond market. They often follow the yield on the 10-year U.S. Treasury note, although they are not directly correlated; the 10-year T-Note closely mirrors the typical life of a mortgage loan, making it a great indicator.
While mortgage lenders do consider what the Fed is doing and saying, they are responding to broader economic signals like:
- Inflation trends
- Employment data
- Investor confidence
- Global events
- Supply and demand for mortgage-backed securities (MBS)
- Economic predictions or impending changes
So yes—the Fed rate can influence the market, which in turn can affect mortgage rates, but it’s not even close to being a direct 1-to-1 connection.
Fed Drops, But Mortgage Rates Rise?
It happens! More specifically, each time within the last 12 months (five times total) that the Fed has either dropped or reported no changes to the Fed Rate, we saw mortgage rates either stay flat or continue on a rising pattern.
Why This Matters
Understanding the difference helps you avoid panic headlines. When you hear “The Fed raised rates again,” don’t assume that mortgage rates will jump overnight. Economic changes may already be factored into the price, or the market may respond differently altogether. Some potential homebuyers wait for an expected change to the fed rate, thinking that this will bring savings — this requires an assumption that Fed Rate and mortgage rates are directly correlated, but as you now know, they’re not.
Bottom Line
The Fed does not set mortgage rates — although its decisions definitely influence the overall interest rate environment. A broader range of economic factors influences mortgage rates.
Thinking of buying or refinancing? Don’t wait for the Fed to “lower rates.” Let’s discuss your goals now and how current market conditions impact you personally, not just the headlines.
My industry experience has taught me to take the time to understand my customers: What's their story? How can I help them in their pursuit of a home? When I see my customers as real people with real goals, needs, and dreams, I get to match them with the best loan product and create a truly seamless lending experience.
Everyone has a story to tell. What they need is a Loan Originator who will listen, customize a loan to meet their needs, and guide them every step of the way.
I look forward to working with you!
NMLS #720664
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