How the Federal Reserve Affects Mortgage Rates

The Federal Reserve influences mortgage rates, but doesn't set them. On June 17, 2026, the central bank left the federal funds rate unchanged at a range of 3.5% to 3.75%.

This is the Fed’s attempt to keep the economy steady while waiting to see whether inflation cools without further intervention. Inflation was already on the high side before the war in Iran began on Feb. 28. Since then, inflation has gotten worse, driven by a spike in oil prices — a force that ripples through the economy to affect mortgage rates.

Mortgage rates are influenced by many elements, including the inflation rate, the pace of job creation, and whether the economy is growing or shrinking. The Federal Reserve's monetary policy is a factor, too, and is set by the Federal Open Market Committee.

» MORE: Fed holds funds rate steady as mortgage rates ease

What the Federal Reserve does

The Federal Reserve is the nation's central bank. It guides the economy with the twin goals of encouraging job growth while keeping inflation under control.

The FOMC pursues those goals through monetary policy: managing the supply of money and the cost of credit. Its main monetary policy tool is the federal funds rate, which is the interest rate that banks charge one another for short-term loans. Although there's no such thing as "federal mortgage rates," the federal funds rate influences interest rates for longer-term loans, including mortgages.

The FOMC meets eight times a year, roughly every six weeks, to adjust monetary policy. Its next scheduled meeting is July 28-29.

The Federal Reserve, mortgage rates and the economy

Mortgage rates respond to a variety of economic signals. Among the most important factors are the availability of jobs, along with how fast prices are rising — two things the Fed doesn’t directly control, but aims to keep in balance by setting monetary policy.

Right now, the labor market is steady. Job gains have beat expectations in recent months and unemployment remained flat at 4.3% in April and May. However, long-term unemployment is trending upward.

The Fed’s bigger concern is taming inflation, ideally keeping it near its 2% benchmark. Since the war in Iran began, disruptions in the Strait of Hormuz have choked off the global supply of oil, causing a spike in oil prices. Higher energy costs make it more expensive to produce and ship goods, which nudges inflation — and mortgage rates — upward.

However, a tentative peace agreement between the U.S. and Iran could ease concerns about energy supply shortages. While any relief is unlikely to be immediate, lower oil prices over time could reduce inflationary pressure and take some upward pressure off mortgage rates.

For the Fed, keeping the federal funds rate steady is a wait-and-see move as it watches whether or not inflation drifts lower on its own without additional intervention.

» MORE: How mortgage rates are determined

Do mortgage rates follow Fed rates?

The Fed and the mortgage market move like dance partners: Sometimes the Fed leads, sometimes the mortgage market leads, and sometimes they dance on their own.

The Fed last cut rates at its Dec. 2025 meeting, when the central bank reduced the federal funds rate by a quarter of a percentage point. The funds rate has been held steady over its four subsequent meetings. Given global tensions and the uncertainty that follows, a rate cut is all but off the table throughout 2026. Some analysts are predicting the Fed will hold rates steady this year, with many flagging the potential for rate hikes later in 2026.

Mortgage rates, on the other hand, have experienced ups and downs. Mortgage interest rates fell gradually through the beginning of the year, dropping below 6% in late February. Rates then rose rapidly in March as markets reacted to the conflict in Iran, eased in April and have been gradually rising again since May.

» MORE: Compare current mortgage interest rates

Federal funds rate and HELOCs

Although there's merely an indirect link between mortgage rates and the federal funds rate, the Fed does have a direct influence on the rates charged on home equity lines of credit, which typically have adjustable rates.

Interest rates on HELOCs are linked to the Wall Street Journal prime rate, which is the base rate on corporate loans by the largest banks. The prime rate, in turn, moves with the federal funds rate.

Prime Rate, Effective 12/11/25

Current prime rate — last changed Dec. 2025	Prime rate last week	Prime rate in the past year — low	Prime rate in the past year — high	Projected median prime rate for 2026
6.75%	6.75%	6.75%	7.5%	6.8%

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