How The Federal Funds Rate Affects Mortgage Rates

Nov 15, 2024

5-minute read

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The Federal Reserve Bank building.

You have likely noticed that mortgage interest rates can vary widely over time. This fluctuation is largely influenced by the federal funds rate, a key tool used by the Federal Reserve, the central bank of the United States.

So, what is the federal funds rate? It’s a vital mechanism through which the Federal Reserve moderates interest rates, guiding the economy through various phases of growth and recession. Understanding the federal funds rate can provide insight into interest rates and home-buying costs.

What Is The Federal Funds Rate?

The federal funds rate is the suggested interest rate at which banks lend funds to each other. It is a key tool in U.S. monetary policy, affecting financial stability by influencing overall interest rates. When the Federal Reserve adjusts the fed funds rate, it can impact your interest rates, particularly for mortgages, altering borrowing costs and economic activity. This helps regulate economic growth and control inflation.