The Federal Reserve is raising rates again, and if you're planning to buy or sell a home, you're probably wondering what that means for your plans. A lot of people assume the Fed sets mortgage rates. It doesn't. But its decisions still matter, and understanding how it all connects can help you make a smarter move.
Why the Fed is raising rates
It comes down to inflation. When prices climb quickly, everything costs more. Buyers lose purchasing power and new homes get more expensive to build. To cool things off, the Fed raises the federal funds rate, its short-term benchmark for what banks charge each other for overnight loans.
That's where the confusion starts.
The Fed sets mortgage rates.
The Fed is one influence on mortgage rates, but far from the only one.
What actually drives your mortgage rate
Mortgage rates closely track the 10-year Treasury yield, which is what investors earn for lending money to the government for ten years. That yield rises and falls with what investors expect from inflation and the broader economy.
Lately, world events have been a big factor. The conflict involving Iran has pushed oil prices higher, which raises inflation worries and tends to lift yields. Any major news on that front can move mortgage rates, for better or worse.
The Fed plays a role too. When it hikes rates to fight inflation, investors take notice, the 10-year yield often rises, and mortgage rates usually follow. The flip side is the reason the Fed does it: once inflation cools, yields have room to fall, and mortgage rates can come down with them. Short-term pain now is meant to set up relief later.
- Inflation runs hot
- Fed raises the federal funds rate
- 10-year Treasury yield climbs
- Mortgage rates usually rise
- Inflation cools
- 10-year yield has room to ease
- Mortgage rates can come down
- Buyers regain purchasing power
More hikes may be coming
Markets currently see better than an 80% chance the Fed raises rates at least once more before the end of 2026, based on CME FedWatch. Another hike would likely keep pressure on mortgage rates in the near term. You can already see that pressure in the weekly numbers since the Fed's September hike.
There is some encouraging news. Inflation cooled more than expected in August. The PCE price index fell to 3.4% from 3.7% in July, and core PCE, the Fed's preferred measure that excludes food and energy, dropped to 3.0% from 3.3%. That progress has lowered the odds of a hike at the Fed's October meeting. Still, inflation has been above the Fed's 2% target for about five years, so meaningful rate relief may take time.
That's why the smartest approach is a plan that works at today's rates, not one that depends on rates falling.
How to make your move work right now
If you're buying
- Get pre-approved so you know your true budget before you start shopping.
- Ask your lender about every option for securing the best rate, including loan type and points.
- Once you're under contract, lock your rate so an increase before closing doesn't raise your payment.
If you're selling
- Decide what matters most: a fast sale or the highest price. Each calls for a different strategy.
- Price for today's buyers, whose budgets are tighter with higher rates.
- Consider offering a rate buydown or other concession. It can help a buyer's monthly payment more than a price reduction would.
The Fed doesn't set mortgage rates, but its rate hikes can keep them elevated for a while. The goal is to bring inflation down, and rates along with it, over time. With more hikes possible this year, waiting for a better rate may not pay off. Let's build a plan that works for you today.