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Mortgage Rates and the Fed Funds Rate (Updated 2023)

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The Federal Reserve raised the Fed Funds Rate after its December 2022 meeting – its sixth increase of the year. The group’s policy rate is now set at a range of 4.25 to 4.5 percent.

After the announcement, mortgage rates went down again.

The divergence of the Fed Funds Rate and 30-year mortgage rates serves as a terrific reminder: the Federal Reserve doesn’t set mortgage rates. However, the group can influence mortgage rates.

Here’s what to know.

The Federal Reserve, Interest Rates, & Mortgage Rates

Quick History of the Federal Reserve

The Federal Reserve is the government’s central banking authority and its agency for monetary policy. The Fed’s primary function is to keep the economy stable and support long-term, manageable expansion.

The Fed’s primary tool for managing the economy is the Fed Funds Rate, a declared interest rate for loans made between two commercial banks overnight. Overnight loans are the shortest loan terms possible. They’re paid back to the lender each morning.

How the Fed Funds Rate Works

When the Federal Reserve lowers the Fed Funds Rate, banks taking overnight loans pay less interest to their creditor, which frees up additional cash on hand to lend inside a community and to local businesses. More currency in circulation supports business growth and speeds up expansion. 

When the Federal Reserve raises the Fed Funds Rate, the reverse happens. Banks’ interest costs rise, so less money is lent into communities, and the economy slows. 

Through the Fed Funds Rate, the Federal Reserve affects the speed of economic growth. 

Graphic: The Fed Funds is an interest rate that acts as a gas or brake pedal on the economy

How Does the Federal Reserve Change Mortgage Rates?

The Federal Reserve can change the Fed Funds Rate and a few other banking interest rates. It doesn’t set consumer mortgage rates. The Fed Funds Rate and the mortgage rates offered by lenders are two different products with little in common.

The Fed Funds Rate, for example, is a government mortgage rate for loans that last overnight. A committee votes on the rate eight times annually, and rates rarely change. By contrast, interest rates for mortgage loans last up to 30 years – equivalent to 10,950 overnight periods – and those rates change at least once every day.

Mortgage rates aren’t a tool to speed up or slow down the U.S. economy. They are for consumers who want to buy or refinance a home.

The Federal Reserve's Fed Funds Rate and 30-year fixed-rate mortgage rates don't move in tandem and anyone who tells you differently is lying

This chart is additional proof that the Fed Funds Rate and mortgage rates are unrelated. If the Federal Reserve controlled mortgage rates, the lines would move in tandem. 

How the Fed Influences Mortgage Rates

The Federal Reserve influences mortgage rates by changing how Wall Street views the future. 

The Fed Funds Rate is ill-suited for such a task because it’s a blunt instrument that changes no more than once every six weeks. 

Thankfully, the Fed has a second, more nuanced tool to steer growth in between its meeting – its speeches.

On average, at least once per week, a Federal Reserve member appears publicly and speaks about economic growth, threats to the economy, and risks of inflation.

What the Fed says is more important than what the Fed does.

Inflation is when the U.S. dollar is worth less tomorrow than it is today.

Some amount of inflation is healthy and expected. The Fed manages to that. The Federal Reserve has held U.S. inflation near a 2 percent annual target for the last decade. Sometimes, though, inflation advances faster than the Fed wants. 

When that happens, everything denominated in U.S. dollars loses value, including mortgage payments.

Mortgages are a 30-year instrument, so inflation hits them hard. Mortgage markets push mortgage rates up because future incoming payments will be less valuable.

Inflation is the enemy of low mortgage rates.

Learn more about mortgages at Mortgage 101

Our Advice: Don’t Fight The Fed

The Federal Reserve’s central role is to promote economic stability. It uses interest rates, rhetoric, and financial instruments to affect growth and focuses on long-term objectives.

The Federal Reserve warns markets before it makes changes, and, as a home buyer, its warnings will help you get better terms when you buy your first home.

Listen to the Fed, and you’ll win. The Fed doesn’t set mortgage rates. It influences them. Learn more about how to lower your mortgage rate.

Happy homebuying.

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