As the central bank of the U.S., the Federal Reserve, also known as the Fed, holds major sway over the cost of borrowing money. Although it doesn't directly set the interest rates on consumer loans, its adjustment of the federal funds rate — the rate banks charge each other for overnight lending — influences interest rates on loans across the economy. When the Fed increases or decreases the federal funds rate, you'll typically see the interest rates on personal, auto, and private student loans follow suit.

By tracking the Fed's moves, you can get a better sense of whether taking out a loan will be more expensive or more affordable. It may even help you time your borrowing decisions so you can secure the best possible rate.

The Federal Reserve sets a target range for the federal funds rate, a benchmark rate that determines how much lenders charge one another for overnight lending. When the Fed increases this rate, lenders generally pass along the higher costs to consumers by raising interest rates on consumer loans and credit cards. When the Fed decreases this rate, lenders may lower the interest rates on their loans as well.

Between February 2022 and August 2023, for example, the Fed increased the federal funds rate from 0.08% to 5.33% in an effort to combat inflation. Rates on loans increased along with it and remain high today, despite a few Fed rate cuts in 2024. The Fed held rates steady at its most recent meeting in July 2025, but economists predict that rates could come down once or twice by the end of the year.

Learn more: Mortgage rate predictions for the next 5 years

The federal funds rate can also influence the prime rate, which is what banks use as a starting point when setting consumer loan rates. Banks typically set the prime rate about three percentage points above the federal funds rate. They may offer this prime rate to the most creditworthy customers and charge higher rates to borrowers with a weaker credit profile.

Personal loan rates are on the high side after the Fed increased its rate multiple times over the past few years. Although it cut the federal funds rate a few times in 2024, average personal loan rates only came down slightly, from a high of 12.49% in February 2024 to 11.57% today (on two-year loans).

Most personal loan rates are fixed, so if you already borrowed one, your rate won't change. A fixed rate stays the same over the life of the loan. But if you're looking to take out a new personal loan, your rate may be higher than it would have been a few years ago.

The good news is that some lenders offer rates starting around 6% or 7%, and most don't go above 36%. These rates are much more affordable than a payday loan, which can come with an APR of 390% or higher.

The Fed doesn't have much of an impact on federal student loan rates, but it can influence private student loan rates. The rates on federal student loans are set by Congress each year and are partly based on the 10-year Treasury note auction, which the U.S. Treasury holds every spring.

Federal student loan interest rates are always fixed, so they stay the same over the life of the loan. They were particularly low in the 2020-21 school year, when Direct Subsidized and Unsubsidized Loans for undergraduates carried an interest rate of just 2.75%. They're much higher today, with a rate of 6.39% for the 2025-26 academic year.

The interest rates on private student loans are influenced by the federal funds rate, and lenders may increase or decrease their rates to keep up with the changes. If you already have a private loan with a variable rate, you could see your rate fluctuate with market changes.

A variable interest rate could also cause your monthly payments to go up and down. If you're a new borrower and want predictable monthly payments, consider a fixed-rate private student loan. If you've already borrowed, you might consider refinancing your student loan to a fixed rate, especially if you can qualify for a better rate than you currently have.

Learn more: How the Fed affects student loan interest rates

The rates on car loans can also be influenced by the Federal Reserve. When the federal funds rate is high, auto loan rates will likely be high as well.

According to Edmunds, the average rate on a new car loan was 7% in August 2025. For used cars, it was 10.7%. These rates haven't changed much from a year ago, when they were at near-record highs.

The federal funds rate isn't the only factor influencing car loan rates, though. Your rate depends on a variety of factors, including your credit score, the type of vehicle you're purchasing, and whether you're getting a new or used car.

Learn more: How to buy a car without a co-signer

While the Federal Reserve's decisions around interest rates are outside your control, there are ways you can boost your chances of securing a decent rate on a loan. Here are a few ways you can qualify for a competitive rate.

Your credit score plays a major role in the rate you get when you take out a personal loan, auto loan, or private student loan. A high credit score can help you access the best rates, while a low credit score means you could get stuck with higher rates and fees.

Consider ways you can improve your score before you apply for a loan, such as making on-time payments on your debts, avoiding too many hard credit inquiries, and paying down credit card balances to decrease your credit utilization.

These steps could be well worth the effort if they score you a better interest rate on a consumer loan.

Your credit score isn't the only part of your finances that lenders consider when you apply for a loan. They're also concerned with your income, employment, and debt-to-income ratio (DTI). Having a reliable income and a history of stable employment can help you access a better interest rate.

You could also reduce your debt-to-income ratio — that’s your monthly debt payments compared to your income — by paying down existing loans or increasing your income. Lenders generally prefer a DTI at or below 35%, though it can vary depending on the loan type.

Private lenders set their own rates, so shop around with multiple loan providers to find your best offer. You can often prequalify for loans online, which is a quick process that lets you check your potential rates without harming your credit. Checking your rates with several lenders could help you save money in the long run.

Lenders may offer lower interest rates on short-term loans and higher rates on long-term loans. This helps them offset the risk of a long repayment term. If you can swing a shorter repayment term, you might benefit from a lower rate. But make sure you can afford the monthly payments, as this strategy wouldn't be worth the risk of defaulting on your loan.

Although you can't control the federal funds rate, you could be strategic about when you apply for a loan. If the Federal Reserve cuts rates, that could be a good time to borrow.

If it seems like rate increases are on the horizon, you may want to lock in a fixed rate before that happens. And if you have a variable rate that keeps going up, you could consider refinancing your debt for a fixed-rate loan.

If you don't have to pay a fee to refinance, as is usually the case with student loans and personal loans, you could refinance multiple times to take advantage of decreasing interest rates and maximize your savings.

This article was edited by Alicia Hahn.

The Federal Open Market Committee (FOMC) is in the midst of its second meeting of 2025. Each time the committee meets, it could mean a change to the federal funds rate — which not only impacts financial institutions, but your bottom line, too.

In its January meeting, the Federal Reserve decided to hold rates steady after implementing three interest rate cuts in 2024. Now, Americans are waiting with anticipation to learn whether another rate reduction is on the agenda. Here’s what the experts think.

Read more: When is the Fed’s next meeting?

The federal funds rate is the interest rate at which depository institutions charge each other for ultra-short-term loans, usually overnight. It's expressed as a range, and financial institutions negotiate a specific rate within that range.

The federal funds rate plays a key role in the Federal Reserve’s management of inflation. When inflation is too high, the Fed typically raises its rate to reduce consumer spending and slow economic activity. Conversely, the Fed may lower its rate to stimulate economic activity and growth.

The federal funds rate doesn’t directly affect the rates offered by individual banks, but it does have an influence. When the Fed’s target rate increases or decreases, rates for high-yield savings accounts, certificates of deposit (CDs), money market accounts, credit cards, home loans, and other banking products generally follow suit.

That means when the Fed’s rate is high, it can be a good time to deposit money in a bank account and earn more interest. When it’s low, it’s a good time to borrow money or refinance at a lower interest rate.

Read more: How do banks set their savings account interest rates?

After inflation peaked in June 2022, the Fed implemented a series of rate hikes in an effort to tame it. Then the Fed held rates steady from August 2023 to September 2024. In September, the Fed decided to lower the federal funds rate by 50 basis points. It cut its target rate by another 25 bps in November, and again in December.

In its last meeting, the Fed held rates steady, noting that inflation still remains somewhat elevated. In a statement, the committee said: “In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”

Here’s a closer look at how rates have changed over time alongside the federal funds rate:

Read more: A look at the federal funds rate over the past 50 years

The Fed’s job is to carefully monitor the economy and maintain stability. During each meeting, it may adjust its target rate and overall monetary policy based on what the economy needs to continue running smoothly. However, it doesn’t necessarily announce its plans ahead of time.

Economic experts monitor the economy's health closely and formulate their own ideas about the Fed’s next move based on the data they have available.

“The statement and press conference will be highly scrutinized as market participants look for any evidence of hawkish or dovish sentiment,” said Luke Tilley, chief economist at Wilmington Trust. “Wilmington Trust thinks the Fed is looking to maintain their current stance due to the uncertainty around the impact of tariffs and other policies. Any forecasted effects are only penciled in at present.”

Tilley noted that while policy uncertainty may raise caution within the Fed, rate decisions are typically based on hard data. “The firm expects the Fed to hold rates steady, and for Chair Powell to emphasize uncertainty,” he said.

Regardless of whether the federal funds rate changes, it’s a good time to evaluate your banking products and potentially make some savvy money moves that could pay off later.

Right now, the national average savings interest rate is well below 1%. But many banks and credit unions offer high-yield savings accounts with APYs as high as 4% or more — at least, for now. If your interest rate isn’t competitive, you could be leaving money on the table.

Take stock of your current deposit accounts, shop around, and see if you’re getting the best rates possible. If you’re not, it could be time to switch banks or open up a new type of account.

One of the major perks of a CD is that it offers a fixed interest rate for the entire term. This allows you to lock in a high APY ahead of any potential rate cuts.

Keep in mind that if you make a withdrawal before your CD reaches maturity, you’ll be subject to an early withdrawal penalty. So be sure to carefully consider your savings goals before tying up your money in a CD. If you’re saving for a longer-term goal (six months to two years), opening a CD and securing a higher rate could help you reach it even faster.

If you’re preparing for a big-ticket purchase (like a car or house), applying for a new loan now could potentially lock you into a higher interest rate.

It’s impossible to predict with certainty how the Fed will change rates — if at all. However, if Fed officials do decide to cut rates in the near future, lenders will likely reduce mortgage rates as well. So it could pay to hold off.

On December 18, the Federal Open Market Committee (FOMC) lowered its benchmark interest rate by 25 basis points or 0.25%, to a range of 4.25% to 4.50%. The move follows a 50-basis-point reduction in September and a 25-basis-point reduction in October.

The cut was expected by investors based on Fed cues earlier in the year. The committee adjusts interest rates in part to encourage a long-term inflation rate near 2%. After three years of inflation above 3%, the rate of price increases fell to 2.4% in September 2024 before rising to 2.7% in November.

The Fed also indicated there would likely be only two rate reductions next year rather than four as previously predicted. The more conservative approach is prompted by the recent uptick in inflation and uncertainty over the outcomes of President-elect Trump’s policies.

The big question investors are asking is how these lower rates could affect their portfolios and investment strategies. Let's provide answers with a closer look at how the stock market typically responds to falling interest rates.

Latest news: Cautious Fed holds rates steady with Trump unknowns looming over outlook

When the Fed cuts interest rates, banks lower the rates they charge on loans made to their customers. On existing variable-rate debt, the reductions are immediate. In this case, business and consumer borrowers quickly benefit from lower ongoing interest expenses. New fixed-rate loans also get cheaper, but existing fixed-rate borrowings are not affected. Fed rate cuts can, however, create opportunities to refinance fixed-rate loans at lower interest rates.

In short, rate cuts lower the cost of borrowing. Cheaper debt is usually good for business, but the reason for the rate reduction influences how corporate leaders and investors respond.

If the Fed lowers rates because inflation is slowing, the response should be positive. Businesses are likely to pursue growth more aggressively. Investors, expecting higher earnings ahead, may funnel more capital into the stock market. This can push stock prices higher.

Lower rates can negatively affect the stock market when they are prompted by an economic slowdown. When the economic outlook is uncertain, corporate leaders and investors can be more cautious about investing in growth.

According to Robert R. Johnson, CEO and chair of active index strategy developer Economic Index Associates, "historically speaking, equities perform substantially better when the Fed is lowering rates rather than when the Fed is raising rates."

Learn more: What is the Federal Reserve?

Investor expectations heavily influence stock prices. For this reason, the effects of a rate change usually begin well before the Fed acts.

When investors expect a rate reduction and the economic outlook is good, stock prices rise. Once the Fed implements the cut, the after-effects can be minimal. The exception is if the rate reduction is more or less aggressive than investors had expected. In that case, the market may shift again as investors adjust to new circumstances.

Learn more: Your step-by-step guide to investing

Johnson, who has extensively studied how the Fed's policies affect stock market returns, identifies the best-performing sectors when interest rates are falling as autos, apparel, and retail.

Johnson also sees opportunity in real estate investment trusts or REITs, particularly mortgage REITs. "With rates expected to continue to fall in 2024 and beyond, both equity REITs and mortgage REITs could be attractive investments," Johnson said.

Learn more: How to invest in real estate: 7 ways to get started

David Russell, global head of market strategy at trading platform Tradestation, expects lower rates to benefit cruise ship operators and airlines. "They're economically sensitive and have significant debt loads," Russell said. "Lower inflation will help their profitability, while lower rates could reduce their borrowing costs."

To summarize, lower interest rates are particularly good for real estate values and companies that rely heavily on debt or discretionary consumer spending.

Investors routinely adjust their holdings and trading behaviors according to their economic outlook. This is evident in the market movements that follow reports on inflation, jobs, and gross domestic product.

Learn more: Jobs, inflation, and the Fed: How they're all related

As an example, the S&P 500 experienced a single-day decline of 3% in early August 2024 after a disappointing July jobs report sparked recession worries.

Market shifts prompted by investor-sentiment trends can encourage many to wonder what moves they should be making ahead of Fed-rate actions. The right answer depends on the investor's timeline and strategy.

Learn more: When is the Fed’s next meeting?

Investors who need to maximize income or growth within a relatively short timeline may see the opportunity to adjust holdings according to the interest rate climate.

Commonly, this involves shifting exposure between stocks and bonds. Bonds are favored when interest rates are rising, while stocks become popular as interest rates fall.

On the other hand, long-term investors with high-quality, diversified portfolios may want to avoid big changes in response to rate adjustments. Overhauling a portfolio based on temporary conditions can easily undermine results over time.

Lane Martinsen, founder and CEO of Martinsen Wealth Management LLC, describes the dangers of making short-term decisions for long-term portfolios.

"Reacting to rate changes can lead to emotional decision-making, which can harm long-term performance," Martinsen said. "Frequent buying and selling to 'time' the market often results in higher costs, taxes, and missed growth opportunities."

Long-term investors might instead rely on changing economic conditions to prompt periodic reviews of their portfolio composition or asset allocation. If the allocation is performing and the risk profile is acceptable, few to no adjustments are needed.

Still, a proven allocation strategy may allow for small changes to improve performance as interest rates evolve. In this scenario, Johnson recommends adjusting sector exposure.

Specifically, when interest rates are expected to drop over time, investors could reduce financial and utilities holdings while increasing exposure to autos, apparel, and retail — sectors that have historically shown strength in falling rate environments.

Investors can implement sector-based adjustments without changing their relative exposures to broader asset classes, such as stocks, bonds, and alternative assets. Doing so should keep the portfolio's risk and appreciation potential fairly stable, which is critical for long-term growth.

With fewer rate reductions now expected in 2025, any boost to earnings or bond prices next year will be more muted. There are also other, potentially offsetting, factors in play. Two to note are high valuations in the S&P 500 and unknown outcomes from any policy changes made by the new president. Major portfolio or strategy changes at this point could be premature. This may be the time for investors to focus on the long-term rather than chase uncertain gains.

A hot job market is usually good news for workers. When the unemployment rate is low, people can easily switch jobs and negotiate better pay from employers. Workers have more money to spend, which drives economic growth.

But low unemployment and strong job growth have a downside: A robust job market can drive higher inflation, setting the Federal Reserve on a course to try to reduce it — which can mean a longer wait before interest rates come down.

Meanwhile, an uptick in unemployment can have a silver lining: When inflation slows and jobless numbers increase, the Fed moves to lower interest rates, just as it did following its November meeting, reducing interest rates by 25 basis points. The Fed has held its key rate steady in 2025 with the low end of its target federal funds rate at 4.25%.

If the latest job numbers have you wondering about the interplay between the labor market, inflation, and the Fed — you don’t need to dig out your old macroeconomics textbook to find out. We’ll explain how the job market and inflation are connected, and how the Federal Reserve uses interest rates to influence them both.

Latest news: US labor market adds 147,000 jobs in June while unemployment falls to 4.1%

A strong job market can drive inflation higher, but high inflation can also reverberate through the US labor market.

A tight labor market is typically defined by low unemployment rates, an increase in job openings, and faster-than-usual wage growth. Businesses need to hire more workers to keep pace with surging demand. As businesses are forced to compete for workers, they’re more likely to offer wage increases and higher pay. After all, if your boss refuses to increase your pay, you can easily take your services to a different employer.

Workers, in turn, have more money to spend, which pushes prices higher. Inflation, after all, is often described as too much money chasing too few goods.

Meanwhile, higher labor costs add to the cost of doing business, said Christopher Decker, Ph.D., a professor of economics at the University of Nebraska-Omaha. “Businesses either have to reduce production, [which] typically involves cutting costs elsewhere, increase prices, or both.”

But high inflation also influences the job market, often drawing more people into the workforce in the short run.

Learn more: When is the Fed's next meeting? 

“High inflation will usually lead to an increase in the number of workers to take advantage of the higher wages being paid,” said Thomas Stockwell, Ph.D., an assistant professor of economics at the University of Tampa who studies monetary policy. “However, as workers realize their purchasing power has been eroded by inflation, they will be less willing to work.”

Most consumers generally can’t absorb higher prices forever, though. So eventually, they’ll have to cut their spending in response to rising prices.

“Higher prices will eventually slow, or even reverse, demand growth,” Decker said. “With less demand, the need for more labor is reduced.”

That’s a big reason the Fed kept interest rates at a 23-year high until recently — to the frustration of many would-be homeowners and other borrowers.

“By reducing demand for goods, services, and business investments, there’s less pressure on both wages and prices, so inflation slows,” Decker said.

Fed policymakers have a dual mandate from Congress to promote stable prices and maximum employment.

Learn more: When the Fed cuts rates, how does it impact stocks?

When inflation is high, the Federal Reserve raises the federal funds rate with the goal of cooling off spending. The federal funds rate is the amount banks charge one another for overnight loans. When banks pay more to borrow money, they pass the cost on to consumers in the form of higher interest rates, making it more expensive to borrow money.

The idea is to tame price increases by getting consumers to scale back on spending. If fewer people are making big purchases, theoretically, prices will grow at a slower pace.

The Fed was laser-focused on inflation in the aftermath of COVID-19 lockdowns when soaring energy prices and supply chain disruptions led to the highest inflation levels in decades. That’s why the Fed raised interest rates 11 times between March 2022 and July 2023.

Learn more: The Fed rate cut: What it means for your bank accounts, loans, credit cards, and investments

But the Fed walks a delicate tightrope when it hikes interest rates. In response to a drop in consumer demand, businesses may reduce hiring, causing the unemployment rate to spike. If consumer spending is weak and the unemployment rate is high, the central bank will often cut interest rates in response.

For example, the Fed slashed interest rates to nearly zero in response to the financial crisis of 2007-09 and the COVID-19 pandemic.

The Federal Reserve’s target inflation rate is pretty clear-cut: Since 2012, it has aimed for a 2% inflation rate as measured by the price index for Personal Consumption Expenditures, or PCE. The PCE has been inching closer to that level. Though it remains above the Fed’s 2% target, it’s still well below its recent peak of over 7% in June 2022.

Watch and learn: How 2% became the Fed’s inflation target

The definition of maximum employment, on the other hand, is a lot murkier.

“There is not an explicit target for unemployment like there is for inflation,” said Stockwell. “But to keep inflation steady, it is important to keep the unemployment rate as close to the natural rate of unemployment as possible. This is the unemployment rate that would exist if there were no shortages or surpluses in the labor market.”

Maximum employment isn’t 0% unemployment, Stockwell said, because some unemployment is healthy. There will always be what economists call frictional unemployment, which is driven by people in transition, i.e., you quit your job to find new opportunities or you’re a recent college grad searching for employment.

Some structural unemployment, which is when workers lose jobs due to factors like technological developments, globalization, or widespread changes in consumer demand, will always exist as well.

“Full employment is when the only people unemployed are those who are frictionally or structurally unemployed,” Stockwell said.

But as inflation has cooled, the Fed’s goal of full employment has come into greater focus. Federal Reserve Chair Jerome Powell cited a slowdown in hiring and an increasing unemployment rate — which stood at 4.1% in December and ticked down to 4% in January. The labor market continued to show surprising resilience in June, with U.S. employers adding 147,000 jobs and the unemployment rate at 4.1%. In other words, it's still relatively low.

Back in 2022, when the Fed first started hiking interest rates, many economists believed a recession and higher unemployment were ahead. Thus far, though, neither has materialized. Instead, the US economy actually grew by 3.1% in 2023. S&P Global Ratings forecasts growth of 2.7% in 2024.

So what gives?

Economists are quick to point out that even at recent peaks, interest rates weren’t that high by historical standards. The economy experienced about 15 years of unusually low interest rates before rates started rising, Stockwell said.

“We don't have high interest rates right now,” Stockwell said. “We have returned to more normal interest rates.”

It’s also important to note that not all industries experience a sizzling job market at the same time. For example, sectors like healthcare, education, and state and local government tend to be relatively inflation-proof and aren’t sensitive to interest rates. These sectors have been hiring in large numbers. Meanwhile, Big Tech tends to be interest-rate sensitive and is more likely to lay off workers in a high-rate environment.

Higher interest rates don’t always slow consumer spending by as much as the Fed would like because they don’t affect everyone equally. If you’re looking to buy a home and lock in a low mortgage, you’re struggling with credit card debt, or you’re a business owner seeking financing to expand, high interest rates are painful. But someone who locked in a low-rate mortgage in 2020 or 2021 and doesn’t carry revolving debt may be largely unaffected by high interest rates, so they can afford to keep spending, even if prices continue going up.

There’s no shortage of speculation about where interest rates are headed. But in his comments following the January meeting, Powell said the Fed is not looking too far ahead.

“As the economy evolves, we will adjust our policy stance in a manner that best promotes our maximum employment and price stability goals. If the economy remains strong and inflation does not continue to move sustainably toward 2%, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly. Policy is well-positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate."

Read more: Chair Powell’s press conference transcript

The Federal Reserve, or “the Fed,” is the central bank of the U.S. and plays an outsized role in shaping the nation’s monetary policy. One of its key functions is setting interest rates. Those rates determine how much Americans earn on their savings and how much they pay to borrow — including when buying a home.

Now, the Fed doesn’t say, “Here are the mortgage rates for buying and refinancing homes.” Instead, it sets what’s called the federal funds rate, and that rate impacts a wide variety of financial products. As a result, when the fed funds rate rises and falls, so do the rates Americans pay on home loans. Sound confusing? Don’t worry. We’re here to break it down so you can make your next buying or refinancing decision more confidently.

Read more: How are mortgage rates determined? It’s complicated.

In this article:

What does the Federal Reserve do?

The federal funds rate

Fed rates and mortgage rates

Do mortgage rates go down when the Fed cuts rates?

Tips for borrowers

FAQs

To understand how the Federal Reserve works, think of the U.S. economy as a farm and the Fed as a farmer in charge of water, representing money and credit. “Our farmer wants enough water flowing into the farm so that the crops grow. Think of that like job creation and economic growth,” said Corbin Grillo, a certified financial analyst with Linscomb Wealth, via email. If the farmer (the Fed) leaves the faucet on full blast, the crops will flood, causing inflation. If the farmer doesn’t water the crops enough, they’ll wither, causing a recession.

The Fed’s job is to continuously make decisions that keep the right amount of water (money and credit) flowing so that its crops (the U.S. economy) grow and thrive.

Dig deeper: Do mortgage rates decrease in a recession?

To control the flow of water (money and credit), the Fed sets the federal funds rate, a benchmark interest rate that affects multiple parts of the economy. Consumers can see the impacts of the fed funds rate on products, ranging from savings accounts to mortgage rates.

And although the federal funds rate doesn’t affect mortgage interest rates as directly as savings or personal loan rates, it does have an influence. (More on that later.)

If the economy is dry — that is, if people aren’t spending money — the Fed adds more water by lowering the fed fund rate to encourage people to spend. Low interest rates make it less expensive to borrow money, so people tend to spend more freely and use credit to make larger purchases. However, if the economy starts to flood because people are spending too much, the Fed dials back the water to keep the crops (economy) alive by increasing the fed funds rate. Higher interest rates encourage people to save instead of spend because borrowing money is expensive.

While the federal funds rate had been at a 23-year high since July 2023, the Fed finally lowered it at its meetings in September, November, and December 2024. The central bank left the rate unchanged at its first five 2025 meetings and plans to be cautious about future cuts.

Read more: When is the next Fed meeting?

Remember how we said that the Fed doesn’t directly set mortgage rates? It’s true. However, the fed funds rate impacts the yield on the 10-year Treasury note, which directly affects what consumers pay when they borrow money, said Kevin Khang, senior international economist with Vanguard, in a phone interview.

“[The] 10-year rate, the yield on that note, is kind of like the absolute minimum people should expect to pay when they borrow,” Khang said. “It serves as a benchmark, and everyone else should expect to pay a little more.” Why more? The middlemen. “Lenders have to get compensated for taking on the credit risk for homeowners.”

So, let’s look at how the 10-year Treasury and mortgage rates have moved together in the past few years. In May 2020, the fed fund rate dropped to 0.05%, and the 10-year Treasury yield was roughly 0.64%. The average rate on a 30-year fixed-rate mortgage at the time was 3.28%. Now, let’s look at the last six months or so.

Inflation meant that the Fed needed to dial back the water, so it raised the federal funds rate. As of early August 2024 (before the Fed finally cut the rate in September), the 10-year Treasury yield was 3.99%, and the 30-year fixed rate was 6.73%.

As of late June 2025, the fed funds effective rate was 4.33%, and the 10-year Treasury was 4.24%. The average 30-year fixed mortgage rate was then 6.77%.

The 10-year Treasury yields and mortgage rates also tend to increase when the federal fund rate increases. However, the inverse is also true.

Usually, the simple answer is yes — mortgage rates tend to go down when the Fed cuts interest rates. Or rather, mortgage rates typically decrease before an anticipated fed rate cut.

However, right now, the answer is: It depends. There's a lot going on in the U.S. economy that impacts mortgage rates other than the Fed rate. Investors' assessments about what Trump is doing in office are affecting the 10-year Treasury yield, and Trump and the Federal Reserve have a complicated relationship. A lot is up in the air about how future Fed rate cuts will impact mortgage interest rates.

Learn more: Will mortgage rates go down in 2025?

Now that you understand the connection between Fed rates and mortgage rates, what should you do with this information? Here are some ideas to consider as you look to purchase or refinance a home in today’s economy.

“We generally wouldn’t recommend consumers spend much time worrying about things that are out of their control,” said Grillo. Since you have no impact on the federal funds rate or the 10-year Treasury yield, it’s better to focus on things in the mortgage process under your control.

Comparing mortgage lenders, interest rates, and closing costs can help you find the best possible product for your credit score, market, and financial situation.

Over the past few years, adjustable-rate mortgages have fallen out of favor as interest rates climbed. Now, these mortgages could help first-time buyers and those refinancing ride an anticipated wave of declining interest rates. Popular mortgages for first-time buyers, like VA and FHA loans, offer adjustable-rate products.

While there’s no guarantee that mortgage rates will decrease, you may want to consider an adjustable-rate loan. A conversation with a mortgage professional can help you understand your options.

If you value consistency and predictability, you may be better off with a fixed-rate mortgage if rates trend downward. With the Fed’s conservative outlook on cutting rates, how long should you wait before locking in a mortgage rate? Khang said the decision is personal and depends on your needs and finances. If you need to move, you may take today’s best rate and hope to refinance into a lower rate later.

Others may have more flexibility. Khang said that those who don’t need to buy now may want to hold out for at least a year now that the Fed has started cutting rates. “Financiers can take some time to adjust their spread [between the 10-year Treasury and mortgage rates],” Khang said. “So, it can take some time for lenders to catch up with lower rates.”

Dig deeper: Adjustable-rate vs. fixed-rate mortgage — Which should you choose?

The Federal Reserve sets the federal funds rate. That rate influences the yield on the 10-year Treasury note, which serves as the index for most mortgage rates in the U.S. As the fed funds rate increases and decreases, so does the yield on the 10-year Treasury; mortgage rates tend to follow the same trends.

If interest rates drop, your mortgage payment may go down if you have an adjustable-rate mortgage. However, if your current mortgage is a fixed-rate product, your interest rate remains the same for the life of your loan unless you refinance to a loan with a lower rate.

The Federal Reserve tends to have the most control over housing interest rates in the U.S. It sets the federal funds rate, which influences rates on various products, including government securities, savings accounts, and loans. As the fed funds rate rises and falls, so do mortgage rates.

Laura Grace Tarpley edited this article.