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How Mortgage Rates Are Set

Mortgage rates move with the bond market, not directly with the Federal Reserve. Understanding the drivers helps you time a lock and set expectations.

Rates follow the bond market

Most mortgages are bundled into mortgage-backed securities and sold to investors. The price investors pay for those bonds sets the rates lenders can offer. When bond prices fall, mortgage rates rise, and the other way around.

What moves the bond market

• Inflation: higher inflation pushes rates up, because it erodes the value of fixed future payments.
• The economy: strong growth and hiring tend to lift rates; weakness lowers them.
• The Federal Reserve: the Fed sets short-term rates and signals policy, which influences the bond market, but it does not set mortgage rates directly.
• Supply and demand: global demand for US bonds affects yields and therefore rates.

Why the Fed cut does not always lower your rate

Mortgage rates often move before the Fed acts, because markets price in expectations ahead of time. A Fed cut that was already expected may not lower mortgage rates, and rates can even rise on the news if the outlook changes.

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Frequently asked questions

Do mortgage rates follow the Fed?

Not directly. The Fed sets short-term rates, but mortgage rates track the bond market and can move independently of Fed decisions.

Why do mortgage rates change daily?

Because the bonds behind them trade every day. Inflation data, economic news, and investor demand move bond prices and therefore rates.

What makes rates go up?

Higher inflation, a strong economy, and falling bond prices generally push mortgage rates higher.