How closely do mortgage interest rates tend to follow the Fed’s rate decisions?

The Federal Reserve slashed the federal funds rate last week for the first time in four years, boosting borrower hopes that the cut trickles down into new mortgage and refinance rates. The Fed’s action ends 14 months of rate pauses that, along with inflation, unemployment and other factors, have prolonged elevated borrowing costs.

Although the Fed doesn’t directly set rates for home loans, its decisions may influence them. Mortgage rates often — but not always— tend to fluctuate in line with the federal funds rate. Sometimes, mortgage rates react before anticipated decisions. For example, mortgage rates dropped roughly a half-percentage point in July and August, perhaps in anticipation of the expected Federal rate cut.

Here’s what you need to know about how the Federal Reserve influences mortgage rates.

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How closely do mortgage interest rates tend to follow the Fed’s rate decisions?

Mortgage rates often trend in the same direction as the federal funds rate. As Robert R. Johnson, a professor at Heider College of Business, Creighton University, notes, “Directionally, mortgage rates follow Fed changes very closely. In other words, you are highly unlikely to see mortgage rates trend upward when the Fed is easing and are highly unlikely to see mortgage rates trend downward when the Fed is tightening. I would argue that Federal Reserve monetary policy is the single most important factor that influences mortgage rates.”

Mortgage rates are influenced by several factors

Federal Reserve decisions may impact mortgage rates, but they’re also affected by inflation, the bond market, the unemployment rate and the broader economy. Generally, when the economy expands, job growth and consumer spending are high, and mortgage rates tend to rise. The opposite is also true: When the economy tightens, typically more people are out of work, spending is down and mortgage rates may fall.

“There are many factors that cause mortgage rates to rise and fall,” says Brian Shahwan, vice president and mortgage broker at William Raveis Mortgage. “The most important factors to watch are week-over-week economic reports. As inflation cools and the economy restabilizes, mortgage rates will soften. If weekly economic data shows a strong economy, mortgage rates will start rising again.”

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Do mortgage rates price in anticipated rate changes?

Yes, mortgage rates often react to anticipated Federal Reserve rate changes before they happen. For example, if the Fed is expected to raise rates, lenders may raise their rates beforehand to avoid paying higher borrowing costs later. By contrast, when lenders expect the Fed to cut interest rates, they may lower their rates early to get ahead of the competition and encourage borrowers to lock in before others lower their rates.

“As we’ve recently seen, markets can be sensitive to the projections announced at each Fed meeting,” says Shahwan. “When mortgage lenders ‘price in’ potential Fed rate hikes or cuts, they are adjusting mortgage rates based on the forecast of the Fed. For example, Fed Chair [Jerome] Powell announced in August that it was time for a cut in September. Mortgage banks, in turn, started dropping rates solely from the rhetoric that inflation was cooling.”

Should homebuyers buy now or wait?

Choosing whether to buy now or wait is a personal decision that will depend on your finances, unique financial situation, lifestyle preferences and long-term goals. If you’ve found your dream home and can comfortably afford the monthly mortgage payment, property taxes and other costs of homeownership, it may make sense to buy now. As many real estate professionals often advise, “Marry the house, date the rate.” In other words, focus on finding your dream home. You could always refinance later if rates drop significantly.

On the other hand, if rates continue to drop, waiting to buy might result in a lower mortgage rate. Of course, timing the market comes with inherent risks. For instance, falling mortgage rates could drive up competition for listed homes and push home prices higher. 

The bottom line

No one can predict with certainty what the Fed will do with interest rates, including the agency itself. At the Fed’s press conference during September’s Committee meeting, Powell acknowledged it isn’t following a preset course. 

Still, Powell anticipates the Fed rate ending the year at 4.40% and closing 2025 at 3.40%. With the rate currently sitting at a range of 4.75% to 5.00%, the agency would have to lower rates again this year and next to hit those targets. If mortgage interest rates follow the Federal Reserve—either in anticipation of a rate cut or after one — borrowers may benefit from even lower rates in the near future.