The Difference Between the Fed Funds Rate and Mortgage Rates (And Why They’re Often Confused)
When interest rates make headlines, you’ll often hear something like: “The Fed raised rates again—mortgage rates are going up.”
While that sounds logical, it’s not entirely accurate.
The Federal Funds Rate and mortgage rates are related, but they are not directly tied to each other. Understanding the difference can help borrowers make better sense of what’s happening in the housing market—and why mortgage rates don’t always move the way people expect.
What Is the Fed Funds Rate?
The Fed Funds Rate is the interest rate at which banks lend money to each other overnight to meet reserve requirements. It’s set by the Federal Reserve and is one of their primary tools for managing the economy.
When the Fed adjusts this rate, it’s typically trying to:
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Slow down inflation
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Encourage or discourage borrowing
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Stabilize economic growth
Changes to the Fed Funds Rate directly affect short-term borrowing, such as:
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Credit cards
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Auto loans
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Home equity lines of credit (HELOCs)
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Business operating loans
What Are Mortgage Rates Based On?
Mortgage rates—especially for 30-year fixed loans—are driven by long-term market forces, not by the Fed Funds Rate itself.
Key factors that influence mortgage rates include:
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Bond market performance, particularly U.S. Treasury yields
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Inflation expectations
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Investor demand for mortgage-backed securities (MBS)
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Economic outlook and global events
Because mortgages are long-term loans, lenders price them based on what investors expect inflation and economic conditions to look like over many years—not overnight lending costs.
How the Fed Can Indirectly Impact Mortgage Rates
Although the Fed doesn’t set mortgage rates, its actions can still influence them indirectly.
Here’s how that connection works:
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When the Fed raises rates to fight inflation, markets may expect inflation to cool
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If inflation expectations drop, long-term bond yields can fall
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Lower bond yields often lead to lower mortgage rates
The opposite can also happen. Sometimes mortgage rates rise before the Fed makes a move because markets are reacting to expectations, not announcements.
This is why you’ll occasionally see mortgage rates:
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Go down after a Fed rate hike
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Go up when the Fed holds rates steady
Why Mortgage Rates Don’t Always Follow the Headlines
The biggest misconception is that mortgage rates move in lockstep with the Fed Funds Rate. In reality:
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Mortgage rates are forward-looking
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The Fed Funds Rate is reactive to current conditions
Markets often price in expected Fed actions well in advance. By the time a rate change is announced, mortgage rates may have already adjusted—or moved in the opposite direction.
What This Means for Homebuyers and Homeowners
If you’re waiting for the Fed to “cut rates” before buying or refinancing, it’s important to know:
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Mortgage rates can move independently of Fed decisions
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Timing the market based solely on Fed announcements can be misleading
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Day-to-day mortgage pricing is driven more by market sentiment than policy headlines
That’s why working with a professional who tracks mortgage markets daily—not just Fed meetings—can make a meaningful difference.
The Bottom Line
The Fed Funds Rate and mortgage rates are connected, but they are not the same thing and they don’t move in a straight line together. The Fed influences the economic environment, while mortgage rates are shaped by long-term market expectations.
Understanding that distinction helps cut through the noise and leads to better-informed decisions—whether you’re buying, refinancing, or simply keeping an eye on the market.
