The Federal Reserve, also known as “the Federal Reserve,” is the central bank of the United States and plays an important role in setting the nation’s monetary policy. One of its key functions is to set interest rates. These rates determine how much Americans earn on savings and how much it costs to borrow money — including when buying a home. The Federal Reserve indirectly affects mortgage rates by setting the so-called federal funds rate, which affects a variety of financial products, including home loans.
To understand how the Fed works, imagine the U.S. economy as a farm, and the Fed as the water farmer, representing money and credit. “Our farmers want enough water flowing into their farms so crops can grow. It’s like creating jobs and economic growth,” Corbin Grillo, a certified financial analyst at Linscomb Wealth, said by email.
If farmers (the Fed) turn the taps on full blast, crops will be flooded, causing inflation. If farmers don’t water their crops enough, they will wilt, causing an economic downturn.
The Fed’s job is to constantly make decisions that keep the right amount of water (money and credit) flowing so crops (the U.S. economy) grow and prosper.
To control the flow of water (money and credit), the Federal Reserve sets the federal funds rate, a benchmark interest rate that affects many areas of the economy. Consumers can see the impact of the federal funds rate on products ranging from savings accounts to mortgage rates.
Although the federal funds rate does not directly affect mortgage rates like savings or personal loan rates, it does have an impact. (More on that later.)
If the economy dries up—that is, if people don’t spend money—the Fed adds more water by lowering the federal funds rate to encourage people to spend money. Low interest rates make borrowing cheaper, so people tend to spend more freely and use credit to make larger purchases.
However, if the economy starts to flood because people are spending too much, the Fed will reduce water use by raising the federal funds rate to keep crops (the economy) alive. Higher interest rates encourage people to save rather than spend because borrowing money is expensive.
Although the federal funds rate has been at a 23-year high since July 2023, the Fed eventually lowered rates at its September, November, and December 2024 meetings.
The central bank kept interest rates unchanged at its first five meetings in 2025, eventually cutting rates by 25 basis points at its September meeting and then another 25 basis points at its October and December meetings.
Remember when we said the Fed doesn’t directly set mortgage rates? It’s true. However, Kevin Khang, head of global economic research at Vanguard Group, said in a phone interview that the federal funds rate affects the yield on the 10-year Treasury note, which directly affects what consumers pay when they borrow money.
“[The] “The 10-year rate, the yield on that note, is kind of like the absolute minimum that people can expect to pay when they borrow money,” Kang said. “It’s a benchmark and everyone else should expect to pay a little more.” Why more? middleman. “Lenders must be compensated for taking on homeowners’ credit risk.”
So, let’s look at how the 10-year Treasury rate and mortgage rates have moved in tandem over the past few years. In May 2020, the federal funds rate dropped to 0.05%, and the 10-year Treasury bond yield was approximately 0.64%. The average interest rate on a 30-year fixed-rate mortgage at that time was 3.28%. Now, let’s look at the past six months or so.
Inflation means the Fed needs to use less water, so it raises the federal funds rate. As of early August 2024 (before the Fed’s final rate cut in September), the 10-year Treasury yield was 3.99% and the 30-year fixed rate was 6.73%.
As of early December 2025, the federal funds effective interest rate was 3.89%, and the effective interest rate on the 10-year Treasury note was 4.14%. At that time, the average 30-year fixed mortgage rate was 6.19%, according to Freddie Mac.
When the federal funds rate rises, the 10-year Treasury yield and mortgage rates tend to rise. However, the reverse is also true.
Usually, the simple answer is yes—when the Fed cuts interest rates, mortgage rates tend to fall. Or rather, mortgage rates typically fall forward Fed rate cut expectations.
However, the answer now is: it depends. In addition to Fed rates, there are many factors in the U.S. economy that affect mortgage rates. Investors’ assessment of Trump’s conduct in office is affecting 10-year Treasury yields, and Trump has a complicated relationship with the Fed.
There are still a lot of questions about how the Federal Reserve’s latest and future rate cuts will affect mortgage rates.
Now that you understand the connection between Fed rates and mortgage rates, what should you do with this information? In today’s economy, here are some ideas to consider when you’re looking to buy or refinance a home.
“We generally don’t recommend that consumers spend too much time worrying about things they have no control over,” Grillo said. Since you have no influence on the federal funds rate or the 10-year Treasury yield, it’s best to focus on the things in the mortgage process that you control.
Comparing mortgage lenders, rates, and closing costs can help you find the product that’s best for your credit score, market, and financial situation.
Adjustable-rate mortgages have fallen out of favor over the past few years as interest rates have climbed. Now, these mortgages can help first-time homebuyers and refinancers navigate an expected wave of falling interest rates. Mortgage loans popular with first-time homebuyers, such as VA and FHA loans, offer adjustable-rate products.
While there’s no guarantee that your mortgage rate will decrease, you may want to consider an adjustable rate loan. A conversation with a mortgage professional can help you understand your options.
If you value consistency and predictability, a fixed-rate mortgage may be better if interest rates are trending downward. Given the Fed’s conservative view on rate cuts, how long should you wait to lock in your mortgage rate? Kang says the decision is personal and depends on your needs and financial situation. If you need to move, you can take the best rate today and hope to refinance to a lower rate later.
Others may have more flexibility. Now that the Fed has begun cutting interest rates, those who don’t need to buy now may want to hold on for at least another year, Kang said. “Financiers may take some time to adjust spreads [between the 10-year Treasury and mortgage rates],” Kang said. “So it may take some time for lenders to catch up to lower interest rates.
The Federal Reserve sets the federal funds rate. That rate affects the yield on the 10-year Treasury note, which is an index for most U.S. mortgage rates. As the federal funds rate rises and falls, so does the yield on the 10-year Treasury note; mortgage rates tend to follow the same trend.
If interest rates drop, your mortgage payments may decrease if you have an adjustable-rate mortgage. However, if your current mortgage is a fixed-rate product, your interest rate remains the same throughout the life of the loan unless you refinance at a lower rate.
The Federal Reserve tends to have the most control over U.S. housing rates. It sets the federal funds rate, which affects interest rates on a variety of products, including government securities, savings accounts and loans. As the federal funds rate rises and falls, mortgage rates also rise and fall.
Laura Grace Tarpley Edited this article.