What You Need to Know

The Federal Reserve's job is to control inflation, but has little ability to influence one of its biggest drivers, Fed Chair Jerome Powell acknowledged at a congressional hearing Tuesday.

Housing is the biggest expense in most people's budgets, and it's also by far the largest component in the official cost-of-living measures that the Fed uses to gauge inflation. While the Fed can put its thumb on the scales of the economy to influence inflation broadly, there's little it can do to lower mortgage bills, Powell said Tuesday at a hearing of the Senate Finance Committee, delivering the Fed's twice-yearly report on monetary policy.

Home prices surged during the pandemic, helping drive the inflation rate to highs not seen in decades. And while inflation has cooled since then, closer to the Fed's target of a 2% annual rate, stubborn housing costs have kept high inflation from subsiding completely.

On top of that, average rates for 30-year mortgages have soared from record lows during the pandemic to near their highest in decades. The increase is partly a result of the Federal Reserve having raised its benchmark fed funds rate to slow down the economy and bring inflation under control.

Treasury Yields Play Important Role

Despite the Fed's role in driving up mortgage rates, the central bank is limited in its ability to bring them down. The fed funds rate dictates the rate at which banks can lend money to one another and heavily influences short-term rates for all kinds of loans, including credit cards and car loans.

The 30-year mortgage rate, on the other hand, is closely related to a different financial instrument: yields on 10-year treasury . Those yields are influenced by the expectations of bond traders about what the fed funds rate will be in the future.

Treasury yields are higher than normal now for many reasons , including investor expectations about inflation, whether or not there will be a recession, and other factors "not particularly closely related to Fed policy," Powell said.

The Fed cut interest rates at the end of last year, but the cuts did little to move mortgage rates. Currently. Powell and other Fed officials have indicated that the central bank has put further rate cuts on hold for the time being and may not reduce the Fed funds rate again anytime soon. In addition, a long-running housing shortage may put upward pressure on prices regardless of what the Fed does.