You’ve probably heard that the Federal Reserve (the Fed) is raising interest rates again. If you’re planning to buy or sell a home, you may be wondering what that means for you.
With so many headlines about rate hikes, it’s easy to assume the Fed sets mortgage rates. That’s a common myth. While its decisions can influence borrowing costs, other economic factors play an important role, too.
The coming months may bring some uncertainty, but with the right strategy, you can still make a move that works for you.
It starts with inflation. When prices rise quickly, everyday expenses become more expensive, reducing buyers’ purchasing power and increasing the cost of building homes.
To help slow inflation, the Fed raises its key short-term interest rate, known as the Federal Funds Rate. However, the Fed influences mortgage rates rather than setting them directly.
As NerdWallet explains, mortgage rates are affected by several factors, including inflation, job growth, the overall economy, and the Fed’s monetary policy.
Mortgage rates tend to follow the 10-year Treasury yield, which reflects the return investors receive for lending money to the U.S. government over ten years. That yield changes as investors respond to expectations about inflation and economic growth.
The conflict in Iran has also put pressure on oil prices, raising concerns about inflation. News about the conflict can therefore affect mortgage rates. A resolution could ease some of that pressure, although the timing is difficult to predict.
When the Fed raises rates to fight inflation, Treasury yields may rise, putting upward pressure on mortgage rates. If inflation cools, yields and mortgage rates may eventually decline, helping restore some of buyers’ purchasing power.
According to CME FedWatch, there was more than an 80% chance of at least one additional Fed rate hike before the end of 2026, based on the expectations reported in the original article.
Another hike could keep mortgage rates elevated in the short term. However, First American Senior Economist Sam Williamson notes that firmer Fed action could eventually help stabilize bond markets and create room for lower mortgage rates, provided investors gain confidence that inflation is coming under control.
There were already some encouraging signs. In August, PCE inflation fell to 3.4%, down from 3.7% in July, while core PCE inflation, which excludes food and energy, dropped to 3%, down from 3.3%.
Although these declines suggest progress, inflation remains above the Fed’s 2% target. Mortgage rates may therefore take time to come down, making it important to build a plan around the rates available today.
Higher mortgage rates can make buying or selling more challenging, but they don’t automatically mean you have to wait.
If you’re buying: Get pre-approved to understand your budget, ask your lender about ways to secure a competitive rate, and consider locking your rate once you’re under contract to protect against increases before closing.
If you’re selling: Decide whether your priority is a faster sale or the highest possible price. Price your home with today’s buyers in mind, and consider offering a mortgage rate buydown or other concessions that could make monthly payments more manageable.
The right strategy depends on your goals, finances, and local market conditions.
The Bottom Line
The Fed doesn’t set mortgage rates, but its decisions can influence them. Although further rate hikes could keep borrowing costs elevated in the short term, the longer-term goal is to bring inflation under control.
Rather than waiting for the perfect rate, focus on a plan that works for your circumstances today.
Contact Lake Michigan Realty to discuss your options and take your next step with confidence.
