When the Federal Funds Rate is high, banks are able to borrow less money and the money they do lend is at a higher rate. There are several things that a lender can examine when determining your mortgage rate. One key factor is your credit score. A higher credit score makes you less risky to lend to and can significantly improve the rate you have to pay. You can also purchase “points” which are pre-payments on your loan interest. Speak with your lender to discuss points and how they might affect your loan. Finally, the amount of down payment can also change the interest rate. Typically, if you have more money up front, you have to borrow less, and you reduce the risk for the lender and your cost for the loan.

Basically, the Federal Funds Rate is a large determinant of what the mortgage rate will be on a given day. And the Federal Funds Rate is largely determined based on the market including factors such as unemployment, growth, and inflation. However, there is no single mortgage rate at a given moment that every borrower will pay. This is because there are also other factors which determine an individual’s mortgage rate, and why they different people will have different rates.
Because loans are more inexpensive, people are more likely to use them to invest in capital. Also, because interest rates are low, savings accounts are reduced because they are not as valuable. This creates a surplus of money in the marketplace which lowers the value of the dollar and eventually becomes inflation. With inflation, mortgage rates increase so the Fed must carefully monitor their rate to ensure that our economy remains level.
The Federal Reserve Bank requires that lenders maintain a percentage of deposits on hand each night. This is called the reserve requirement. Banks will borrow from each other to meet their reserve requirements.