How do interest rate changes by the Federal Reserve affect mortgage rates?

When the Federal Reserve changes interest rates, it primarily influences the broader economy, including mortgage rates. When the Federal Reserve raises interest rates, it often leads to an increase in mortgage rates as lenders adjust their rates in response to the higher cost of borrowing. This is because many lenders use the federal funds rate as a benchmark for determining the interest rates they offer on mortgages.

Consequently, when the Fed raises rates, borrowing becomes more expensive for banks and, in turn, for consumers seeking mortgage loans. This increase makes home loans less affordable, which can slow down housing market activity. Market expectations and the lending environment react to these changes, where higher rates indicate a tightening of credit conditions.

Understanding this mechanism helps clarify the connection between Federal Reserve actions and mortgage rates. Lowering interest rates typically encourages lenders to reduce mortgage rates to stimulate borrowing, but the question pertains specifically to the scenario when rates are raised, and in that case, the correlation is clear: higher Federal rates result in higher mortgage rates.