How the Federal Reserve Affects Mortgage Rates

The Federal Reserve influences mortgage rates, but doesn't set them. On July 29, 2026, the central bank left the federal funds rate unchanged at a range of 3.5% to 3.75%.

Inflation remains above the Fed's 2% target and has accelerated in recent months, fueled in part by higher oil prices. The central bankers aren’t ignoring the inflation problem — they’re waiting to see how much staying power it has. Officials are biding their time for data on how higher energy costs continue to push prices up across the economy before considering another rate hike.

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 Didn’t Raise Rates After All — Will Mortgage Rates Fall?

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 Sept. 15-16.

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.

The labor market has remained surprisingly resilient, giving the Fed room to focus on inflation. While hiring has slowed, unemployment remains relatively low.

Right now, inflation is the Fed's bigger challenge. It was already running above the central bank's 2% target before renewed fighting in Iran sent oil prices sharply higher. Because energy costs ripple through the economy, more expensive oil can push up the cost of everything from manufacturing to shipping, adding to inflationary pressure.

» 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. It has held rates steady at its five subsequent meetings, but that pause may be nearing its end. As inflation pressures mount, futures markets are now pricing in a high likelihood of at least one rate hike before year-end — starting as soon as the Fed’s next meeting in September.

Meanwhile, mortgage rates are responding to the inflation outlook, too. Starting in early March, mortgage rates climbed sharply as the conflict in Iran fueled concerns about higher oil prices. After a brief dip in April, rates have remained elevated ever since

» 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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