Understanding the Federal Reserve's Role in Mortgage Rates (2024)

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• The Federal Reserve slows inflation by raising the federal funds rate, which can indirectly impact mortgages.
• High inflation and investor expectations of more Fed rate hikes can push mortgage rates up.
• If investors believe the Fed may cut rates and inflation is decelerating, mortgage rates will typically trend down.

The Federal Reserve announced at the close of its July meeting that it will continue holding the federal funds rate steady, but left the door open for cuts later this year. In his press conference following the meeting, Fed Chair Jerome Powell even suggested that central bankers could start cutting rates at the Fed's next meeting in September.

This means we could see mortgage rates inch down in the coming months. But it depends on how inflation trends between now and September.

Understanding the Federal Reserve's role in mortgage rates

The Federal Reserve's actions are a big influencer in where mortgage rates head. Here's what to know about this bank and how it plays into rates.

What is the Federal Reserve?

The Fed has two main jobs, called its "dual mandate": maintain price stability and keep unemployment low.

When the economy heats up too much, prices tend to grow faster than is healthy. When this happens, the Fed uses monetary policy tools that put downward pressure on inflation. Its primary tool for slowing inflation is the federal funds rate, which is the interest rate banks charge each other to borrow money overnight. Increasing this rate slows economic growth.

When the economy has slowed too much and needs a boost, the Fed will cut the federal funds rate to make it cheaper for banks to borrow money. During the COVID-19 pandemic, the Fed reduced rates to near zero to stimulate a struggling economy.

How Fed meetings affect mortgage rates

When the Fed decides to make changes to its benchmark rate, called the federal funds rate, it can indirectly impact the kinds of rates you're offered from mortgage lenders. This will in turn impact how much you pay each month for a home.

Mortgage rates don't directly follow the federal funds rate. Instead, they typically move up and down with 10-year Treasury yields, because mortgage rates are largely impacted by investor demand.

"Fixed mortgage rates are typically set based on the yield of the 10-year Treasury bond," says Michael Gifford, CEO and co-founder of Splitero, a home equity investment company. "This bond is usually the most closely monitored by investors. As the Federal Reserve raises short-term interest rates, the yield on the 10-year Treasury bond also tends to rise. This puts upward pressure on mortgage rates. The Fed's rate hikes can also signal to lenders that inflationary pressures may be increasing, which can lead lenders to raise their interest rates in response, including mortgage rates."

To be clear: Your own personal mortgage rate will depend a lot on the circ*mstances of your financial profile: your credit score, debt-to-income ratio, and how much you have for a down payment. But larger rate trends in the mortgage market can be impacted by a lot of different factors, including current economic conditions, inflation, the unemployment rate, and the housing market.

Recent trends in mortgage rates after Fed meetings

To see how the Fed's actions impact mortgage rates, you can look at past rate increases. See below for recent mortgage rate trends after Fed meetings:

Historical Fed meetings and mortgage rates

The Fed began raising interest rates in early 2022, in an attempt to cool high inflation. It raised rates seven times in 2022 and four times in 2023. Since then, the Fed rate has held steady.

In the time since the Fed began raising rates, mortgage rates have climbed steadily. In March 2022, before the first rate increase, the average 30-year mortgage rate was under 4%. For most of 2024, it's hovered between 6% and 8%.

Recent changes and trends

The Fed spent most of 2022 aggressively raising rates to try to tame decades-high inflation. In response, the Consumer Price Index, a major measure of inflation, has come down substantially from where it peaked in June 2022. In June 2024, this index rose 3.0% year over year, a slowdown from the previous month's reading.

Inflation remains slightly elevated, which kept Fed policymakers from cutting rates at their most recent meeting in July. But if conditions continue to improve, it's possible we could see the Fed lower rates more than once later this year.

What to expect from upcoming Fed meetings

Though mortgage rates don't always move in lockstep with the federal funds rate, it's a good idea to have a basic understanding of when and why Fed policy moves might impact mortgages — especially if you're planning to get a mortgage or refinance sometime soon. This means not only watching what the Fed does, but also what its officials say about future policy changes.

Upcoming Fed meetings and mortgage rate predictions

The CME FedWatch Tool shows that investors expect the Fed to cut rates at its September meeting. Additional rate cuts could be possible at the November and December meetings, too.

As for how that will affect mortgage rates, industry groups largely expect those to fall slightly. Fannie Mae's latest housing forecast shows rates dropping to 6.7% by year's end and 6.6% by the first quarter of 2025. The Mortgage Bankers Association forecasts a 6.6% rate by the end of 2024 and a 6.4% rate by the end of Q1 2025.

Key factors to watch

The big factor to watch is inflation. If inflation inches downward, the Fed is more likely to reduce rates. But if inflation remains near its current level, the Fed may be forced to keep rates higher for longer (in order to quell spending).

The Fed's impact on mortgage rates FAQs