What determines 30-year mortgage rates?
30-year mortgage rates are set by a number of factors, including demand of funds and anticipated inflation. Longer-term rates rise when investors expect inflation, since inflation saps the purchasing power of the monthly mortgage payment. There is very little correlation between the short-term federal funds rate and longer-term mortgage rates. For example, at the end of 2009, the Fed funds rate was close to zero, while 30-year mortgage rates were above five percent. How the Fed can affect 30-year rates The Fed can’t greatly affect 30-year mortgage rates with the federal funds rate, but it does have other tools at its disposal. It can purchase mortgage-backed securities to drive down the price of long-term mortgage rates. In fact, this is what the Federal Reserve did during the financial crisis of 2008 and 2009 to stimulate the housing market with lower rates on 30-year loans. The program allowed the Fed to spend hundreds of billions of dollars on these securities. Partly as a result, m
