NOV. 5, ‘25 // Mortgage and the fed If you’ve been thinking of buying a home or investing in real estate—but are waiting to see what the Fed is going to do—you’re not alone. After all, the Federal Reserve rate is in the news almost every day. Just last week the rate dropped a quarter of a point. Mortgage rates should follow, right? Is now the time to pull the trigger, or should you wait for the next cut? To answer that question, we need to know a little bit about the three most important interest rates in our complex economy. Spoiler alert: interest rates usually move together, but not always. Sometimes when the Fed Funds rate drops, mortgage rates even rise! 1) The Fed Funds rate is the one the news is always chattering about. It’s determined by the Federal Reserve and is the basis for all other short-term rates, like the amount the bank pays on your savings account. 2) The prime rate is the one set by the banks. It determines most borrowing costs – everything from your auto loan to credit cards to your home equity line of credit. It generally moves in lockstep with the Fed Funds rate. 3) Mortgage rates are different. They are mainly determined by long-term Treasury bonds which are not controlled by the Fed. These Treasury bonds typically have 10-year terms and are priced based on the market’s assessment of the economy. When the economy is doing well, investors tend to pull out of the Treasury bonds to earn a better return elsewhere. This tends to push up long-term rates. When the economy is doing poorly, investors will often wait out the storm in Treasuries, which are safer. hoW does raising interest rates help inflation? When it comes to the Fed’s influence on interest rates and how raising interest rates can help inflation, it’s important to understand that the Fed has a triple mandate: to promote maximum employment, moderate long-term interest rates and stabilize prices. When prices are rising more quickly than the Fed’s target 2% annual rate of inflation, the spending power of consumers and businesses decreases, which in turn destabilizes the economy and puts the triple mandate at risk. To cool inflation, the Fed may use its influence to raise interest rates. Higher interest rates make it more expensive to borrow, meaning that consumers and businesses will be less willing to spend money. This decreases demand, theoretically bringing prices down. 130
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