Mortgage Myth Buster: The Fed doesn’t directly set mortgage rates.
When headlines say, “The Fed raised rates today,” many homeowners and homebuyers immediately assume mortgage rates will jump the next morning. But here’s the truth: mortgage rates aren’t directly set by the Federal Reserve.
The real driver of mortgage rates is the bond market, specifically the yield on the 10-year U.S. Treasury note.
Why the Fed Doesn’t Directly Control Mortgage Rates
The Federal Reserve sets the Federal Funds Rate—the short-term interest rate banks charge each other for overnight lending. This impacts things like credit cards, auto loans, and savings accounts. But mortgage loans are long-term products, often lasting 15 to 30 years. That makes them much more sensitive to the long-term bond market than to the Fed’s overnight lending rate.
The Bond Market Connection
When investors buy or sell bonds—particularly the 10-year Treasury—yields move. Mortgage-backed securities (MBS), which are bundles of home loans sold to investors, tend to move in lockstep with those yields.
If Treasury yields rise, MBS yields must rise to remain attractive to investors.
As MBS yields rise, lenders increase mortgage rates to keep the returns competitive.
In other words, it’s the bond market—not the Fed—that dictates the direction of mortgage rates.
So Why Do Mortgage Rates Move When the Fed Acts?
While the Fed doesn’t directly set mortgage rates, its actions influence investor sentiment. When the Fed raises or lowers its policy rate, it sends signals about inflation, growth, and risk. Investors respond by buying or selling bonds, which shifts Treasury yields—and that’s when mortgage rates change.
The Bottom Line
Understanding the bond market’s role can help you cut through the noise. Mortgage rates follow the broader forces of supply, demand, and investor expectations in the bond market—not simply the latest Fed announcement.
At Acquest Lending, we keep a close watch on these market dynamics so we can guide you with clarity, not headlines.