How the Federal Reserve Affects Mortgage Rates

The Federal Reserve influences mortgage rates, but doesn't set them. On Sept. 17, 2025, the central bank reduced the federal funds rate by a quarter of a percentage point, to a range of 4% to 4.25%.

In the news release accompanying the announcement, the committee members said, "Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up 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 meeting is Oct. 28-29.

Watch: Fed Cuts Rates — Now What?

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. The most recent jobs report showed a rising unemployment rate in August as the economy grew by 22,000 jobs — much less than investors had expected.

With the unemployment rate rising, the Fed is reducing short-term interest rates. Lower rates, in turn, are intended to stimulate the economy by making it cheaper for consumers and businesses to borrow.

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, which is why the Fed kept short-term interest rates on the high side until this meeting. The idea was that higher borrowing costs would slow the economy and bring down inflation.

The consumer price index increased 0.4% in August, the Bureau of Labor Statistics announced Sept. 11, to an annual rate of 2.9%. The core CPI, which excludes food and energy prices, rose to an annual rate of 3.1%.

Unemployment and prices are rising at the same time. It's an unusual situation that forces the Fed to address one and not the other. Starting with this meeting, the central bank is battling unemployment instead of fighting inflation.

» 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 July 29-30, the central bank held the federal funds rate steady. The next week, following a grim jobs report, mortgage rates fell. They've gone down in most weeks since then, by a total of more than a quarter of a percentage point.

» 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.