Mortgage rates tend to move in the same direction as Federal Reserve rates; both are influenced by the dynamics of supply and demand. However, the supply/demand equation for mortgage rates may be different from the supply/demand equation for Federal Reserve rates.

Example: A bank may have borrowed 100 million dollars to fund mortgage loans allowing them to offer lower rates even in the face of rising interest rates.

In an expanding economy the demand for credit (loans) increases, driving up interest rates – with more buyers, sellers can command higher rates. Conversely, as the economy slows, the demand for credit lessens and interest rates will likewise fall.

Inflation is also a major factor driving interest rates. Inflation results from the prices of goods and services increasing in times when the economy, thus demand, is strong. A growing economy will spark a rise in inflation at which time the Federal Reserve will step in and increase interest rates, slowing the economy and reducing inflation. As a result: higher real estate prices, higher rents and higher mortgage rates

Two additional factors (out of many!) playing on mortgage rates are:

Fannie Mae Backed Security rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as mortgage-backed securities. The rates on these securities influence mortgage rates very strongly.

Ginnie Mae-Backed Security rates: Ginnie Mae pools large quantities of mortgages, securitizes them and sells them as mortgage-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans.