The Federal Reserve raised a key short-term interest rate Wednesday by one-quarter of a percentage point in its quest to stifle inflation. The action might not have much of an effect on mortgage rates in the short term — but it could help to push them lower in the long term.

The overnight federal funds rate will rise by 0.25 percentage points to a range of 4.5% to 4.75%. The prime rate will rise by a quarter of a percentage point to 7.75%. Interest rates tied to the prime rate, including those for home equity lines of credit, will go up by 0.25%, too. But mortgage rates won’t necessarily follow.

Mortgage rates fall along with inflation

Everyone knew weeks ago that the Fed would raise the overnight rate at this meeting. Even so, fixed mortgage rates fell through much of January. It wasn't a big drop: The 30-year fixed-rate mortgage averaged 6.29% in January, down from 6.38% in December.

But whenever mortgage rates and the federal funds rate move in opposite directions, it serves as a reminder that the Fed influences mortgage rates but doesn't set them. Mortgage rates are governed by a constellation of market forces.

Lately, mortgage rates have been heavily influenced by inflation. The inflation rate is falling, and that's the main reason mortgage rates went down in January. The latest consumer price index, from December, showed that overall prices increased 6.5% over the previous 12 months. That's down from a peak of 9.1% in June.

2% inflation still a stretch goal

The Fed's goal is to push the inflation rate to 2%, so it has a ways to go. "The Federal Reserve will continue to increase short-term rates to fight inflation, and will ultimately be successful, but it will be early 2024 before inflation reaches their 2% target," Michael Fratantoni, chief economist for the Mortgage Bankers Association, said in an email.

The Fed's monetary policy committee meets eight times a year, and this was the eighth rate increase in a row. The central bank took off gently last spring, then mashed the pedal to the metal with four increases of 0.75 percentage points in a row in summer and fall. Now it has throttled back: first with a half-point rise in December and now with this quarter-point rise.

Planes, rates and automobiles

Lorie Logan, president of the Federal Reserve Bank of Dallas, used a different automotive metaphor when explaining the smaller rate hikes: "Now, if you’re on a road trip and you encounter foggy weather or a dangerous highway, it’s a good idea to slow down," she said in a speech Jan. 18. In her telling, the fog consists of "data and qualitative reports (that) will become even more mixed as the economy slows."

Fed Governor Christopher J. Waller, in a Jan. 20 speech, went with an aeronautical metaphor while explaining the Fed's reasoning. "After climbing steeply and using monetary policy to significantly raise interest rates throughout the economy, it was apparent to me that it was time to slow, but not halt, the rate of ascent," he said.

It's smart to slow the rate hikes, says Daryl Fairweather, chief economist for real estate brokerage Redfin, "because they don't want to go too far in the hawkish direction." That could cause economic growth to stumble, doing more harm than good, she says.

HELOC payments will go up