The federal funds rate and mortgage rates

How the federal funds rate affects finance
Mortgage rates and the federal funds rate

Mortgage rates are dictated mostly by market movements, but the Fed can have a huge influence on rates.

Even though the federal funds rate is not tied to mortgage rates, it affects them indirectly because it impacts lenders' borrowing costs.

"If it is more expensive for banks to borrow, they will pass that expense on to their customers," says Brett Sinnott, director of secondary marketing at CMG Mortgage Group in San Ramon, Calif. "In the current environment, any change will have a direct, instant and negative impact on rates."

The Fed also uses monetary stimulus programs, such as bond purchases, to help keep mortgage rates where it wants them.

When the Fed buys mortgage bonds and U.S. Treasuries, it increases demand for these investments. Such purchases tend to keep mortgage rates down. In the other direction, The Fed can decrease demand by selling bonds, which could send mortgage rates up.

The Fed's economic projections also influence mortgage rates, as they affect investors' sentiments. A gloomy economic outlook usually means lower mortgage rates. Signs of a stronger economy often result in higher mortgage rates.



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