Many economic indicators influence mortgage rates, but the biggest factor is still Fed policy.  Current mortgage rates aren't following a completely predictable pattern, so borrowers should look long term rather than trying to guess week-to-week rate changes.

Mortgage rates tend to follow prevailing Fed rates rather closely, but not in lockstep.  This year, when banks are tight with money but are simultaneously struggling to turn a profit, current mortgage rates may appear to have little relationship to Fed rate policy decisions.

That was especially true at the beginning of 2008, when the Fed frequently and aggressively slashed rates in response to various economic indicators that foresaw an imminent recession. But banks held rates relatively steady, hoping that any spike in mortgage loan activity or refinancing would give them a chance to capture elusive profit margins. Similarly, while Fed rates plummeted, some mortgage rates-those for jumbo loans-soared. That's because investors fled the higher risk mortgage loan sectors, making jumbos and other riskier loans harder to find. With the demand for jumbos high and their supply low, lenders who made such loans could afford to ask exceptionally high rates-and get them.

Mortgage rate influences

What does all this mean?  Ultimately, mortgage rates are determined by the law of supply and demand, not by the Fed. There are also other influences besides those determined by the Fed that help to give direction to current mortgage rates. Many adjustable-rate mortgages (ARMs), for example, are tied to the UK-based Libor rate, which is established by Britain's counterpart to our Fed. If the Libor rate moves in a direction different than that of Fed rates, an American homeowner could possibly see his ARM rate change in a way that appears to have no direct correlation to the Fed.

Other factors can have a significant impact on current mortgage rates. Right now, many economic indicators point to higher rates in the future.  As a result, despite the fact that the Fed is holding rates steady, most mortgage rates are still moving higher. That's because the investors who make mortgage loans are anticipating higher rates and raising their rates-and their potential profit margins-ahead of time.  When trouble began to brew with the recent crashing stock prices of Fannie Mae and Freddie Mac, that news also sent mortgage rates higher in anticipation of trouble down the road. If Fannie and Freddie are unable to guarantee loans, investors will raise their prices to compensate for the additional risk they have to assume. When the stock of Fannie and Freddie fell, it sent current mortgage rates higher in a defensive reaction.

For that reason, the average consumer should consider the overall long term movement of mortgage rates, rather than try to guess which way rates will go in the near term because of monthly Fed meetings or other financial and economic news of the day.