Feb. 26--Homeowners, and those looking to buy a home, wondering what's going to happen to 30-year mortgage rates shouldn't look to the Federal Reserve's next meeting for their answer.

Instead, they need to watch the daily fluctuations of the longer-term U.S. Treasury bonds as they react to news of inflation, the value of the dollar, the trade deficit and the status of the economy in general. But the Federal Open Market Committee's in ent is to maintain a healthy economy, and this means curbing inflation while not discouraging the spending that is the country's economic engine. So FOMC decisions relating to a short-term interest rate do, in the end, play a role in mortgage rates. Confused -- Let's back up. When the FOMC meets -- it is next scheduled to meet March 18 -- it may raise, lower or leave the federal funds rate -- the amount banks charge each other on overnight loans -- alone.

Those moves can lower short-term interest rates, said Vincent Woodward, vice president, asset liability strategy at People's United Bank, because the FOMC is adding liquidity to the system and making it cheaper to borrow money. A bank will reflect the F MC's move in its prime rate, which banks use as an "index" for some of their lending, said Denise Hall, senior vice president, Treasury sales manager for Webster Bank. "It really is pretty automatic," because the banks are competing for borrowers, she said of a bank's decision to move its prime rate as the FOMC moves the federal funds rate. "It's really more of a marketing decision." But "You don't see a lot of home mortgages tied to prime," Hall said, because banks can, and do, change that rate and consumers wouldn't be able to adjust payments.

Adjustable mortgage rates do change, but on a preset schedule. But home equity loans, credit cards, business loans and lines of credit will be tied to prime. The borrower's creditworthiness determines whether they pay the prime rate, minus 1 percent, for example, or prime plus 1 percent. The longer-term mortgage loans instead reflect the fluctuating value of the 10-year Treasury bond. But, Woodward said, not with the tight correlation seen between short-term rates and the federal funds rate. Because these are essentially loans to the federal government, they are considered "safe" investments, said Todd Martin of Todd P. Martin Economic Services.

"There's not a big appetite for taking risk right now," Martin said, so demand for these has been high. As with any commodity, rising demand drives prices higher. But with Treasuries, the yield -- what you get when you divide the price paid for it by th interest by it in the previous year -- moves in the opposite direction, so rising prices mean falling yields. And if prices fall while the interest rate stays the same, the yield rises, because for less of an investment, you're getting a better return, Woodward said. "If you're a bond holder, then enemy No. 1 is going to be inflation," Martin said, because that long-term investment won't be worth as much at maturity if the value of money declines.

"Inflation is primarily a monetary event," Martin said, where an incr ase to the money supply ultimately pushes prices higher, because more money is vying for the same number of goods and services. If an individual's earnings don't keep pace with inflation, then their buying power declines. And when the FOMC cuts the short-term rate, it further devalues the dollar, said Stephen Habetz, president of Threshold Mortgage in Westport. This makes imports more expensive and pushes inflation higher. Habetz's company tracks rates and arranges mortgages for its clients. The average cycle for a consumer to be in a home is 10 years, he said, which is why the mortgage rates get measured against the 10-year bond.

If an investor in these fixed-income securities believes inflation will rise, then they'll want a better return, and would instead put their money into stocks, gold "or whatever asset you think you're going to get a better rate of return on," Martin sai . "A lot of it has to do with anticipated inflation versus actual inflation." If the FOMC cuts the funds rate too much, inflation could rise, which would push the long-term yields, and the long-term rates tied to them, higher, because the demand for these as investments would lessen, Martin said. But the FOMC also doesn't want th housing market to collapse, which could result if it gets too expensive to buy a house.

"The bond market's been all over the map today," Habetz said Monday, so mortgage rates are changing frequently. "They don't move in lock step. It's an indicator, but it's not an absolute." According to Freddie Mac, the average rate on a 30-year mortgage has been rising in recent weeks. Thursday, the quasi-government agency, which buys mortgages up to the $417,000 "jumbo" level in order to free up money for banks to lend, said the average ate was 6.04 percent, the highest since early January. "They're at a point right now where they're in a bit of a tricky situation," Martin said of the FOMC. "We're walking on a razor's edge," Woodward said, with the economy needing stimulus from the FOMC, but that leads to inflation.

The minute fears of rec ssion diminish, he said, the FOMC will begin tightening -- raising -- the federal funds rate. For now though, Habetz said, the FOMC's concern about the lack of economic growth is outweighing its worry about inflation. "I think, ultimately, we're going to see long-term mortgage rates come down," he added.