Answer
The federal reserve can only vary the interest rate at which they loan money to other banks as well as is loaned between banks on a short-term basis (usually overnight). the fed can enforce these rates in various ways including the creation (very often) or destruction (very rare) of money. the long-term rates on the other hand are determined at the market by the buying and selling of long-term bonds and treasuries. these can be for 10 or even up to thirty years. all these government and commercial bonds (money lent at a set rate of interest) have a market price that will vary from the original price. if the people who bought these securities think the us economy is doing well and they trust the fed. not to print money like there was no tomorrow then they like to own these securities and the price stays high. but if, as initially mentioned, by trying to set interest rates the fed produces much new money this is inflationary and the owners of long-term government bonds (treasury bills etc.) will not be happy because the value of their investments will be devalued by inflation. when they loose confidence in the us economy or the ability of the fed. to stabilize the dollar these investors (very often overseas banks and governments) will stop buying long-term bonds and maybe even start selling some. this causes their price to drop. since these securities pay fixed interest rates on the original issue price when the market price drops this equates to an increase in interest rates. summing up: when the fed drops short-term rates excessively thereby causing inflation, confidence is lost in the market place and selling causes interest rates on long-term bonds to increase. since house mortgages are also long term mortgage rates go up as well.
