Though historically fed funds rates and mortgage interest rates move in the same general direction, the trends of the two rates—which are distinctly separate—have moved in different directions over the last couple of years, the Federal Reserve Bank of Atlanta points out in its recent Economy Matters economic research note.
Mortgage rates and other interest rates have moved in opposite directions following the Federal Reserve’s interest rate cuts over the past year, the Atlanta Fed says.
Mortgage rates trended higher since earlier in the decade, leading to a decrease in home affordability, according to the Atlanta Fed’s Home Ownership Affordability Monitor. Mortgage rates rose above 5% percent in April 2022, and have remained above that level ever since, according to Freddie Mac’s 30-year fixed rate mortgage average in the United States. Before April 2022, rates had been below the 5% threshold since February 2011.
The Federal Reserve sets short-term interest rates—the Fed funds rate—not mortgage rates, the Atlanta Fed points out. The Fed Reserve makes changes in the Fed funds rate—cutting them, increasing them, or leaving them as is—an effort to fulfill its dual mandate from Congress: promoting maximum employment and stable prices.
The Fed’s short-term rates factor into how banks and financial institutions set many other rates, such as those for business loans, credit cards, and auto loans.
For the past 20 years, mortgage rates have been more closely associated with the interest paid on 10-year Treasury notes than with the fed funds rate set by the FOMC, according to Kris Gerardi, a research economist and senior adviser and Domonic Purviance, subject matter expert with the Atlanta Fed’s Supervision and Regulation Division.
“While mortgage rates do, typically, move fairly closely with short-term interest rates like the fed funds rate, they are more strongly linked to longer-term rates such as the 10- or 20-year Treasury yield,” Gerardi said. “This is because the average life of a mortgage is around seven to 10 years.”
Mortgage rates respond to many economic signals besides the Fed funds rate, Holden Lewis writes in a Nerd Wallet blog. “The availability of jobs is one of those signals. Because of the government shutdown, a jobs report for September wasn’t released. The most recent jobs report was for August, and it showed a slowdown in hiring and an increase in the unemployment rate.”
