Market conditions (i.e., supply and demand) contribute to interest-rate fluctuations, but monetary policies implemented by the Federal Reserve are the primary driver. Although the Fed doesn’t set mortgage rates, it does set a federal funds rate, which is the rate banks use to make short-term loans to each other. The federal funds rate, in turn, influences the rates banks charge to loan you money. When the federal funds rate goes up, mortgage rates tend to go up as well.
Low rates encourage borrowing, and borrowing stimulates the economy, so the Fed sets the federal funds rate low when the economy is sluggish. For example, in response to the Great Recession, the Fed reduced the federal funds rate from 5.25% in September 2007 to between 0% and 0.25% in December 2008. The federal funds rate currently sits in that same range as the U.S. economy recovers from the effects of the COVID-19 pandemic.
Here’s a look at how today’s mortgage rate compares to the average annual rate for 15-year fixed mortgages over the last several years:
|Year||Average Annual Rate|