How the Federal Reserve Affects Mortgage Rates

The Federal Reserve influences mortgage rates, but doesn't set them. On Dec. 10, 2025, the central bank reduced the federal funds rate by a quarter of a percentage point, to a range of 3.5% to 3.75%.

In the news release accompanying the announcement, the committee members said, "Uncertainty about the economic outlook remains elevated," and added that the job market has looked shakier in recent months.

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.

Watch: What December's Fed cut means for mortgage rates

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 Jan. 27-28.

The Federal Reserve, mortgage rates and the economy

Mortgage rates respond to a variety of economic signals besides the federal funds rate. Among the most important factors are the availability of jobs, along with how fast prices are rising. But the mortgage market has been operating on incomplete information. So has the Fed, making it hard for the central bank to decide what to do.

There's been a lack of economic data because of the government shutdown. Agencies delayed or canceled reports on employment, inflation and other indicators.

Based on the information it has, the Fed believes inflation and unemployment are both moving in the wrong direction. The central bank deems unemployment the harder hole to dig out from, and that's why it cut the federal funds rate. Lower interest rates make it cheaper for businesses and consumers to borrow. That's supposed to stimulate the economy and encourage job creation.

» 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 Oct. 28-29, the central bank reduced the federal funds rate by a quarter of a percentage point. Since then, mortgage rates have been relatively stable, moving up and down in small increments.

» 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.