How the Fed Sets Interest Rates (and Why Mortgages Don’t Follow)

The Federal Reserve controls one short-term rate directly: its Federal Open Market Committee (FOMC) votes a target range for the federal funds rate, the overnight rate at which banks and some other institutions lend reserves to each other. Since September 17, 2026 that range has been 3.75%–4.00%: the September 16, 2026 increase was decided 12–0 (FOMC statement), and on October 28 the FOMC held it there by a 10–2 vote (FOMC statement). Every other rate (Treasury yields, mortgages, corporate loans, savings accounts) moves through markets that take the Fed’s rate and expectations about its future as one input among several.

The FOMC has twelve voting members: the seven Board governors, the president of the New York Fed and four of the other eleven Reserve Bank presidents on one-year rotations (Federal Reserve). It meets eight times a year.

Scope. This page explains the mechanics in the US as of October 26, 2026: the tools, the balance sheet and the link to long-term rates. It does not forecast decisions, and how stocks behave around Fed days is covered in Fed rate cuts and stocks and the stock market on Fed days. It is education, not advice.

Because reserves are plentiful, the Fed no longer moves its rate by making reserves scarce; it sets what reserves earn. Before 2008 the New York Fed’s trading desk added or drained small amounts of reserves each day so that banks would bid the fed funds rate to target. Today banks hold $2.96 trillion of reserves (October 21, 2026), far more than they need for payments, so the price of an extra dollar is set by its alternatives. Reserve requirements have been zero since March 26, 2020 (Federal Reserve), which does not mean banks need no liquidity: liquidity and capital rules still apply.

The logic is arbitrage. A bank can earn 3.90% risk-free by leaving cash at the Fed, so it has little reason to lend overnight for less. Money market funds are not banks and cannot earn interest on reserves, so the Fed also takes their cash overnight at 3.75% through its reverse repo facility, with a limit of $160 billion per counterparty per day. That is the floor. At the top, the standing repo facility lends cash against Treasuries and agency securities at 4.00%, so dealers have little reason to pay more. The facility was created on July 28, 2021 with a maximum operation size of $500 billion (Federal Reserve).

Source: implementation note, October 28, 2026, and New York Fed, October 22, 2026. All rates in this table are tied to the 3.75%–4.00% range (raised on September 16, 2026, held on October 28) and change when the range changes.

The Fed held $6.75 trillion of assets on October 21, 2026, of which $4.57 trillion were Treasury securities, and the shrinking known as quantitative tightening (QT) ended on December 1, 2025. The FOMC announced that end date on October 29, 2025 (statement). From December 11, 2025 the New York Fed was directed to buy Treasury bills to keep reserves ample (implementation note); the September 2026 directive keeps those purchases as something to do “when appropriate”.

On the other side of the ledger sit bank reserves ($2.96 trillion), currency, the Treasury’s cash account and the reverse repo facility. Reverse repo use is the clearest sign of how much spare cash money funds have: it peaked at $2,553.7 billion on December 30, 2022 and was $0.2 billion on October 23, 2026, as funds moved their cash into Treasury bills and private repo.

Weekly totals: Federal Reserve H.4.1 via FRED (WALCL). The glossary entry on QE and QT explains why purchases push long-term yields down and runoff pushes them up.

The FOMC said inflation remained elevated and that the increase would support “a timelier return” to its 2% goal. Consumer prices were 3.7% higher in September 2026 than a year earlier (BLS CPI index 336.298 vs 324.245, via FRED), after an energy supply shock lifted Brent crude from $61.98 on January 2 to $138.21 on April 7, 2026. The move took the range from 3.50%–3.75% to 3.75%–4.00%, and the FOMC held it there on October 28, 2026, with Lisa D. Cook and Beth M. Hammack dissenting in favor of another quarter-point increase. This page does not predict the next decision; the October 2026 Fed meeting guide covers the dates and what markets watch.

No. A 30-year fixed mortgage is priced off the 10-year Treasury yield plus a spread for prepayment and credit risk, and the 10-year yield reflects the whole expected path of rates, inflation risk and a term premium, not tonight’s rate. The Fed influences it through expectations and its bond holdings, but a cut can coincide with rising mortgage rates when markets expect higher inflation or heavier Treasury supply.

Worked example (illustrative). Take a $400,000, 30-year fixed loan. The monthly payment is P × i / (1 − (1 + i)^−360), with i = annual rate / 12. At 6.22% (December 11, 2025), i = 0.005183 and the payment is $2,455.07. At 7.32% (October 22, 2026), i = 0.0061 and the payment is $2,747.72: $292.65 a month more, while the Fed’s range was only 0.25 point higher than on December 11, 2025. Yields: Treasury via FRED; mortgage rates: Freddie Mac survey via FRED.

For bond holders the same logic matters more than the headline decision: see how the bond market works and how rate-sensitive a portfolio is.

The floor system works when reserves are ample, and it has failed when they were not. On September 17, 2019, with reserves at about $1.34 trillion after a tax date and a Treasury settlement drained some $120 billion, the fed funds rate printed 2.30%, above the top of its range, and the secured overnight rate jumped above 5% (FEDS Notes, February 2020). The Fed responded with repo operations and, from October 2019, bill purchases. That episode is why the standing repo facility exists and why the Fed now buys bills to keep reserves from getting too low; the full story is in what is the repo market.

Limitations. The tools above describe the US in October 2026 and can change at any meeting (dates on theFOMC calendar). The overnight rate is not what households pay: card, auto and business loan rates add credit spreads that widen in stress. And the administered rates cap overnight moves, not the 10-year yield. The wider map, from the Fed to banks, markets and custody, is in how the financial system works.