How the Fed Rate Affects Mortgage Rates (and Why the 10-Year Treasury Matters)

When you hear that the Federal Reserve, led by Jerome Powell, is raising or lowering interest rates, it’s natural to wonder how that impacts mortgage rates. After all, most people buying a home are far more concerned about their monthly payment than about complicated financial policy. Here’s how it all connects.

The Fed sets something called the federal funds rate. This is the short-term rate that banks charge each other to borrow money overnight. While mortgage rates are not directly tied to this rate, the Fed’s decisions send strong signals to the broader financial markets. When the Fed raises rates, borrowing in general becomes more expensive, which can push mortgage rates higher. When the Fed lowers rates, borrowing becomes cheaper, which often helps mortgage rates move down.

But here’s the key: mortgage rates usually follow the yield on the 10-year U.S. Treasury bond more closely than the Fed’s rate itself. Investors see the 10-year Treasury as one of the safest places to put money. When the bond yield rises, investors are demanding a higher return, and mortgage lenders respond by raising rates to stay competitive. When the yield falls, mortgage rates typically fall with it.

So why does the Fed matter? Because its decisions shape how investors feel about the economy and inflation. If the Fed lowers rates, investors often expect slower inflation and steadier growth, which can push the 10-year yield down — and that’s when mortgage rates improve.

In short: the Fed doesn’t control mortgage rates directly, but it strongly influences them by steering the economy and shaping investor expectations. The 10-year Treasury bond acts as the bridge, translating those expectations into the mortgage rates you see when you shop for a loan.