The Federal Reserve, also known as “the Fed,” is the central bank of the U.S. and plays a significant role in shaping the nation’s monetary policy. One of its key functions is setting interest rates. Those rates determine how much Americans earn on their savings and how much they pay to borrow — including when buying a home. The Fed indirectly impacts mortgage rates by setting what’s called the federal funds rate, and that rate impacts a wide variety of financial products, including home loans. What doe ...

Core Insights - The Federal Reserve (the Fed) plays a crucial role in shaping U.S. monetary policy, primarily through setting the federal funds rate, which influences various financial products, including mortgage rates [1][4][20] - The Fed's adjustments to the federal funds rate aim to balance economic growth and inflation, akin to managing water flow for crops [3][5] Federal Reserve Functions - The Fed controls the flow of money and credit in the economy by setting the federal funds rate, which serves as a benchmark interest rate affecting multiple economic sectors [4][20] - A lower federal funds rate encourages spending by making borrowing cheaper, while a higher rate discourages spending to prevent inflation [5][9] Impact on Mortgage Rates - Although the Fed does not directly set mortgage rates, changes in the federal funds rate affect the yield on the 10-year Treasury note, which in turn influences mortgage rates [6][10] - Historical data shows that as the federal funds rate increased, the 10-year Treasury yield and average 30-year fixed mortgage rates also rose, indicating a correlation between these rates [9][10] Recent Trends - The federal funds rate was at a 23-year high since July 2023 but was lowered in late 2024, with the effective rate at 4.33% and the average 30-year fixed mortgage rate at 6.35% as of mid-September 2025 [6][9] - The relationship between the Fed's rate cuts and mortgage rates is complex, influenced by various economic factors beyond just the Fed's actions [12][18] Borrower Considerations - Borrowers are advised to focus on controllable aspects of the mortgage process, such as comparing lenders and interest rates, rather than worrying about the federal funds rate [14] - Adjustable-rate mortgages may be beneficial for first-time buyers as interest rates are anticipated to decline, while fixed-rate mortgages offer consistency for those valuing predictability [15][17]