The Federal Reserve plays a major role in shaping mortgage rates, even though it does not set mortgage rates directly. Understanding how the Fed rate works helps explain why housing affordability rises and falls, and why price controls often create shortages.
The Federal Reserve as a Price Fixer
The Federal Reserve is, at its core, a price fixer. By raising or lowering interest rates, it attempts to control the price of money. Like all price controls, this intervention creates distortions and shortages somewhere in the economy.
Interest rates are supposed to be set by the market based on risk, savings, and demand for capital. When the Fed interferes, it overrides those signals.
How Fed Rate Cuts Affect Mortgage Rates
When the Federal Reserve lowers its benchmark rate, borrowing becomes cheaper across the financial system. Mortgage lenders respond by offering lower mortgage rates, which increases demand for housing.
Lower rates allow people who could not qualify for loans in a market-rate environment to borrow money and buy property they otherwise could not afford.
Why Lower Rates Create a Housing Shortage
This may sound positive, but it creates a serious problem. Lower interest rates do not create more houses overnight. Instead, they increase demand without increasing supply.
The result is a shortage of homeownership. More buyers chase the same number of homes, pushing prices higher and locking out responsible buyers who did not want to overextend themselves.
The Ripple Effect on the Entire Economy
This distortion does not stop with real estate. Cheap money affects everything, including business investment, food prices, asset bubbles, and government spending.
Businesses take on projects that only make sense under artificially low interest rates. Consumers take on debt they cannot sustain long term. Prices rise across the board.
Why Low Rates Reward Bad Government Ideas
When interest rates are set by the market, bad ideas fail quickly because borrowing is expensive. Governments are forced to prioritize, and voters learn faster.
When the Federal Reserve suppresses rates, federal, state, and local governments can borrow cheaply to fund bad ideas. Instead of failing, those ideas are rewarded with low-cost financing.
This creates a dangerous feedback loop. Bad policies lead to more borrowing, more debt, and eventually more inflation.
Final Thoughts
The Federal Reserve’s control over interest rates directly affects mortgage rates, housing affordability, and economic stability. While lower rates feel helpful in the short term, they distort markets, create shortages, and reward poor decision-making.
Understanding this helps explain why housing keeps getting more expensive, even when borrowing feels cheap.
