How the Federal Reserve Affects Mortgage Rates

The Federal Reserve influences mortgage rates, but doesn't set them. On Oct. 29, 2025, the central bank reduced the federal funds rate by a quarter of a percentage point, to a range of 3.75% to 4%.

In the news release accompanying the announcement, the committee members said, "Job gains have slowed this year, and the unemployment rate has edged up but remained low through August; more recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated."

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.

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 Dec. 9-10.

The Federal Reserve, mortgage rates and inflation

Mortgage rates respond to many economic signals besides the federal funds rate. The availability of jobs is one of those signals. Because of the government shutdown, a jobs report for September wasn't released. The most recent jobs report was for August, and it showed a slowdown in hiring and an increase in the unemployment rate.

Inflation is another major influence on mortgage rates and the Fed's monetary policy. The Fed's goal is to maintain an inflation rate of around 2%. Inflation has been above that for some time. Meanwhile, "both the supply and demand for labor has declined," Fed Chair Jerome Powell said in an Oct. 14 Q&A session.

The Fed believes inflation and unemployment are both moving in the wrong direction. The central bank deems unemployment the more serious problem. It has cut short-term interest rates twice this fall to make it cheaper for businesses and consumers to borrow. That's supposed to stimulate the economy and encourage job creation.

Watch: Will Another Fed Cut Affect Mortgage Rates?

» 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.

In the Fed's previous meeting, on Sept. 16-17, the central bank reduced the federal funds rate by a quarter of a percentage point. Even before that meeting, mortgage rates had fallen substantially in anticipation of rate cuts in September and October.

» 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. Expect HELOC rates to fall a quarter of a percentage point within a billing cycle or two.