When you look at mortgage rates, do you ever wonder how they come up with the numbers? It isn't as mysterious as it seems. The Federal Open Market Committee uses market conditions to help determine the rates that you'll pay for mortgage loans.

When you're considering a mortgage loan, a primary factor in your decision is the mortgage rate that you'll pay. If you're opting for an adjustable-rate mortgage, you'll want to be sure that you can meet your commitment, even if interest rates rise. That's why it's important to understand how mortgage loan rates are determined.

The Federal Reserve Bank

When people talk about America's monetary policy, they're referring to the actions taken by the Federal Reserve Bank (the Fed) that affect the availability and cost of money and credit. The Federal Reserve's job is to keep the economy on an even keel.

Janet yellen

Federal Reserve Chair Janet Yellen

To accomplish this, the Fed works through subdivisions, one of which is the Federal Open Market Committee (FOMC). The FOMC regulates open market operations, which is the buying and selling of U.S. Treasury and federal agency securities.

By buying securities, extra reserves are added to the banking system, so mortgage and other interest rates fall. By selling, reserves are lowered and interest rates rise.

The Dual Mandate

The Fed has what is called the "Dual Mandate:" to keep prices stable and promote full employment. Basically, that means keeping inflation at an optimal level and promoting economic growth. Too little inflation can mean stagnant economic growth, while too rapid growth can produce high inflation.

The main way the Fed does this is by influencing interest rates. Lower interest rates help boost the economy and encourage higher inflation, while higher rates can cool down an overheated economy and rein in inflation.

The Fed's key tool here is the federal funds rate. This is the rate that banks charge each other when they make overnight loans to other banks using money deposited at the Federal Reserve. At each meeting, the FOMC raises, lowers, or keeps the fed funds rate the same.

The federal funds rate is basically the lowest rate charged for any type of lending. As a result, it sets the pattern for interest rates of all sorts and has a direct impact on home loan interest rates.

The FOMC

The FOMC is made up of twelve members, which include the seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, and four of the remaining eleven Reserve Bank presidents, who each serve a one-year term on a rotating basis.

The FOMC holds eight meetings each year. The purpose of these meetings is for the Committee to review current economic and financial conditions, and then decide the best course of action to take when setting monetary policy. Their policy goals are always to keep prices stable and the economy growing at a healthy rate.

If you're wondering "where are mortgage rates headed?", keep your eye on the Federal Reserve. Their decisions are reported in the business section of all major newspapers and their online versions as well.

Published on January 5, 2016