Mortgage rates

Inflation is the single most important driver of mortgage rates. When inflation rises, lenders demand higher rates to ensure the real value of their returns isn't eroded over time. The Federal Reserve monitors inflation closely — primarily through the PCE (Personal Consumption Expenditures) index — and raises or lowers the federal funds rate in response. High inflation leads to higher rates across the economy, including mortgages.

Mortgage rates track the 10-year U.S. Treasury yield more closely than the Fed funds rate. When investors sell Treasury bonds — pushing yields higher — mortgage rates tend to rise with them. Treasury yields reflect the market's collective expectations about future inflation, economic growth, and Fed policy. This is why mortgage rates can move even on days when the Fed doesn't act.

The Fed controls the federal funds rate — the rate at which banks lend to each other overnight. While this doesn't directly set mortgage rates, it influences the broader interest rate environment. When the Fed cuts rates, it signals looser monetary policy, which tends to push mortgage rates lower over time. Markets anticipate these moves well in advance, which is why futures-based tools like CME FedWatch are useful for tracking where rates may be headed.

A strong labor market typically means higher inflation risk, which leads to higher rates. When unemployment is low and wages are rising, consumer spending tends to increase — putting upward pressure on prices. Conversely, rising unemployment signals economic weakness, which can push the Fed toward rate cuts and bring mortgage rates down. Monthly jobs reports from the Bureau of Labor Statistics are among the most closely watched economic releases for this reason.

The probabilities shown above are derived from 30-Day Fed Funds futures contracts — financial instruments traders use to bet on where the Fed funds rate will be at future dates. These probabilities shift daily based on new economic data. A weaker-than-expected jobs report or a drop in inflation will typically push cut probabilities higher. Stronger data or hawkish Fed commentary pushes them lower. The further out the meeting date, the wider the range of possible outcomes and the more volatile the probabilities tend to be.

Most mortgages are bundled into mortgage-backed securities and sold to investors. The yield investors demand on MBS directly determines the rate lenders can offer borrowers. When MBS demand is high — often when stock markets are uncertain — mortgage rates can fall even without Fed action. This is why mortgage rates sometimes move independently of both the Fed funds rate and Treasury yields.