The Federal Reserve and Mortgage Rates: A Complex Relationship
The Federal Reserve, often referred to as the Fed, is the central banking system of the United States, tasked with managing monetary policy to promote economic stability. One of its most significant influences is on mortgage rates, which affect millions of homeowners and prospective buyers. While the Fed does not directly set mortgage rates, its policies—particularly those involving interest rates and money supply—play a pivotal role in shaping them.
The Federal Reserve’s Role in the Economy
Established in 1913, the Federal Reserve has a dual mandate: to maintain stable prices (control inflation) and maximize employment. It achieves these goals through tools like the federal funds rate, open market operations, and quantitative easing. The federal funds rate—the interest rate at which banks lend to each other overnight—is particularly critical. While it’s a short-term rate, it serves as a benchmark that influences broader borrowing costs, including mortgage rates.
How the Fed Influences Mortgage Rates
Mortgage rates are primarily determined by the bond market, particularly the yield on the 10-year U.S. Treasury note, which serves as a reference point for long-term borrowing costs. The Fed’s actions indirectly affect these yields through its monetary policy:
Federal Funds Rate Adjustments: When the Fed raises the federal funds rate to combat inflation, borrowing costs across the economy tend to increase. Banks and lenders, anticipating higher returns on safer investments like Treasury notes, often raise mortgage rates to maintain profitability. Conversely, when the Fed lowers rates to stimulate economic growth, borrowing costs, including mortgage rates, typically decline.
Open Market Operations: The Fed buys or sells government securities to influence the money supply. Buying securities injects money into the economy, often lowering interest rates, including those for mortgages. Selling securities has the opposite effect, tightening the money supply and potentially pushing rates up.
Quantitative Easing and Tightening: During periods of economic distress, the Fed may engage in quantitative easing, purchasing large quantities of mortgage-backed securities (MBS) and Treasury bonds. This increases demand for these securities, lowering their yields and, consequently, mortgage rates. For example, during the 2008 financial crisis and the COVID-19 pandemic, the Fed’s aggressive bond-buying programs helped keep mortgage rates at historic lows. Conversely, when the Fed unwinds these purchases (quantitative tightening), yields may rise, pushing mortgage rates higher.
Forward Guidance: The Fed’s public statements about future policy intentions can influence market expectations. If the Fed signals that rates will remain low for an extended period, investors may keep bond yields—and thus mortgage rates—lower. Conversely, hints of rate hikes can drive yields and mortgage rates upward as markets adjust.
Up, Down, or Sideways, Plan and Profit with The Commonwealth Group
The Federal Reserve’s influence on mortgage rates is undeniable but indirect, mediated through its broader monetary policy tools and market dynamics. By adjusting the federal funds rate, managing the money supply, and signaling future actions, the Fed shapes the borrowing environment that ultimately affects mortgage rates.
As of June 2025, the Federal Reserve continues to navigate a complex economic landscape. Inflation, employment trends, and global economic conditions will shape its future actions. However, with the still new Trump administration, the Fed has come under pressure regarind the direction of interest rates. Both President Trump as well as Director Pulte of the FHFA have been critical regarding what they perceive as a failure to keep up with lowered inflation expectations.
While no one can predict rates with certainty, monitoring Fed announcements, economic indicators like inflation and unemployment, and Treasury yields can provide clues about where mortgage rates are headed. Whether President Trump and Director Pulte are ultimately successfully in convincing the Fed that interest rates are too high is a wildcard in predicting future interest rates.
For lenders, if and when rates may drop will have an outsized influence in business and staffing decisions. Many lenders are taking a wait and see attitude before deciding to hire staff that may or may not be needed based on the direction of interest rates.
Because of this, The Commonwealth Group represents a viable and flexible alternative to hiring staff. Through the use of Commonwealth’s fulfillment services, a lender only pays for the services they need.
Hundreds of lenders have placed their trust in The Commonwealth Group. The flexibility lenders need leads to greater profitability.