By Monica Singhania
The Federal Reserve (the Fed) is responsible for setting monetary policy in the United States. Monetary policy is concerned with managing inflation and supporting a healthy economy. The Fed has a dual mandate: to keep inflation around its 2% target and to help the economy achieve maximum employment.
To manage this mandate, the Fed uses several tools. One of the most important is setting the target range for the federal funds rate. The federal funds rate is the interest rate at which banks lend reserves to each other overnight to meet their reserve requirements. As the name suggests, the fed funds rate is a short-term interest rate. By setting this range, the Fed conducts monetary policy to help keep the U.S. economy stable, aiming for full employment and stable prices.
Given this backdrop, when the Fed sets the fed funds target range, it directly affects short-term lending rates. Examples include credit card rates, short-term home equity lines of credit (HELOCs), and other short-term loans offered by banks.
Mortgage rates and the 10 Year Treasury Yield
One of the most popular mortgage products in the U.S. is the 30-year fixed-rate mortgage. Because mortgages are typically taken out over 15- to 30-year periods, they are considered long-term loans. For this reason, mortgage rates tend to follow the 10-year U.S. Treasury yield (often referred to as TNX) more closely than the fed funds rate. This makes sense because the average life of a 30-year mortgage is often closer to 7–10 years, which is more aligned with the 10-year Treasury than with very short-term rates.
However, mortgage rates are not exactly the same as the 10-year Treasury yield. The difference between the two is called the “spread.” In simple terms:
**Mortgage Rate = 10-Year Treasury Yield + Spread**
This spread typically ranges from about 1% to 3% and reflects factors such as supply and demand for mortgages in the mortgage-backed securities (MBS) market, expectations for inflation and economic growth, and lender costs and profit margins.
Mortgages are bundled into mortgage-backed securities (MBS) and sold to investors, who require a higher return than Treasuries to compensate for prepayment risk, credit risk, and liquidity risk. They can vary by product and borrower profile too. If the Fed does not directly set mortgage rates. – then how are mortgage rates determined? Mortgage rates are influenced by several factors.
Broadly speaking we can list the following factors that affect the mortgage rates :
1.Inflation Expectations – When inflation is high, investors demand a higher return to maintain their purchasing power. As a result, higher inflation expectations tend to push up yields on the 10-year Treasury, and mortgage rates usually move higher as well. Lower inflation expectations generally have the opposite effect and can help bring rates down.
2. Economic Expansion or Contraction – When the economy is expanding, with strong GDP growth and high labor force participation, investors often expect higher inflation in the future. This typically leads to higher interest rates. During periods of economic slowdown or contraction, expectations for inflation may fall, which can put downward pressure on rates.
3. Demand and Supply for MBS – Mortgages are bundled into mortgage-backed securities (MBS) and sold to investors such as pension funds and insurance companies. When demand for MBS is high, investors are willing to accept lower yields, which helps reduce mortgage rates. When demand is weak, investors require higher yields, which leads to higher mortgage rates.
4. Monetary Policy Set by the Fed – When the Fed wants to stimulate the economy, it may lower the target federal funds rate. This generally leads to lower interest rates across many types of loans, making credit cheaper and encouraging borrowing and spending. When inflation is running too high, the Fed may raise rates to slow the economy, make credit more expensive, and pull excess liquidity out of the system. This tends to push interest rates higher.
Mortgages rates and FOMC meetings
It is important to understand that even though Federal Open Market Committee (FOMC) meetings—which are held several times a year—are closely watched, they may or may not have an immediate impact on mortgage rates because of the other factors listed above.
For example, one of the big themes in 2025 has been that the Fed cut rates by 25 basis points (0.25%) in each of the three meetings held in September, October, and then in December. Overall, in 2025, three cuts of 0.25% were delivered, totaling a 0.75% rate reduction for the year.
During this same period, mortgage rates for the 30-year fixed hovered around the 6.5% range in September, and as of December 26, they are at about 6.25%. So, the 0.75% in Fed rate cuts has not fully translated into a similar move in mortgage rates.
From this example, we can see that trying to perfectly “time” the market based on the Fed’s calendar has not been particularly productive in 2025. If you are waiting to purchase a home or refinance to lower your payment, it may be more effective to focus on taking advantage of periodic dips and day-to-day volatility in mortgage rates rather than relying solely on the schedule of Fed meetings.
**Disclaimer:** The information in this article is provided for general informational and educational purposes only and should not be construed as financial, tax, or investment advice. Interest rates, lending guidelines, and market conditions can change quickly and may vary by lender, product, and individual situation. Before making any decisions about taking out a mortgage, refinancing, or purchasing a home, you should consult with a qualified mortgage professional and/or a licensed financial advisor who can evaluate your specific circumstances and objectives.