Does the Federal Reserve affect Mortgage Rates?

The federal funds rate and mortgage rates are both types of interest rates, but they operate differently. The Fed directly controls the federal funds rate, which primarily influences short-term interest rates, while mortgage rates are determined by lenders based on long-term bond yields and various economic factors like inflation and market demand. This means that while both rates can move in the same direction, they don’t always do so. For instance, when inflation rises, mortgage lenders may increase rates to protect their returns, even if the Fed lowers its rate. This nuanced relationship reflects differing priorities: the Fed balances inflation with job market stability, while lenders focus on the erosion of their future payments. Historical data supports this divergence, illustrating that Fed rate changes don’t consistently correlate with mortgage rate adjustments.