The Fed's interest rate decisions impact mortgages, but the relationship isn't straightforward. Tharon Green/CNET
If you tracked the Federal Reserve's monetary policy decisions last year, you might have been puzzled: The Fed's three interest rate cuts didn't bring about lower mortgage rates. In fact, the average rate for a 30-year fixed home loan has hovered around 6.8% for the past several months.
The Fed's interest rate decisions don't have a direct or immediate effect on home loan rates. Often, what the central bank says about its future plans can move the market more than its actual rate changes.
On Wednesday, the Fed is expected to hold off on cutting interest rates for the fifth time this year. While mortgage rates might see some ups and downs, many economists think they'll stay pretty much the same -- between 6.5% and 7% -- until the economic outlook is clearer.
"Prospective homebuyers should know markets are forward-looking, and changes in mortgage rates can happen well in advance if markets can anticipate it," said Kara Ng, senior economist at Zillow. "While a July cut is unlikely, markets are closely watching for signals about a possible September reduction," Ng said.
All eyes will be on Fed Chair Jerome Powell's post-meeting remarks. If Powell signals concerns about lingering inflation or the chance of fewer cuts, bond yields and mortgage rates are likely to climb. If he expresses optimism about inflation being under control and hints at ongoing policy easing, mortgage rates could dip.
Here's what you need to know about how the government's interest rate policy influences your home loan.
What is the Federal Reserve's relationship to mortgage rates?
The Fed sets and oversees US monetary policy under a dual mandate to maintain price stability and maximum employment. It does this largely by adjusting the federal funds rate, the rate at which banks borrow and lend their money.
When the economy weakens and unemployment rises, the Fed lowers interest rates to encourage spending and propel growth, as it did during the COVID-19 pandemic.
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