The basic reason is that they have to be different for the banks to earn money. The Fed Fund Rate is just the rate at which banks lend money to other banks at the Fed. So mortgages will also be a bit higher.

Changing the rate was probably a bit less effective than usual because of the problems of this crisis. If what I learned for my Econ final is to be trusted, then this was a bit of a new challenge for the Fed.

The whole problem with the subprime mortgage crisis was that no one knew who had the worthless investments, so banks basically went into a panic and started withholding credit. They just didn't trust other banks to pay it back. An action like lowering the Fed's Fund Rate will only work by encouraging more lending. This fails if the banks don't feel like lending to each other. A number of banks wished to hoard their liquid currency to maintain strong and a number weren't that interested in taking a new loan just to make mortgages. That was the crux of the crunch and why they had to resort to the bailout to jam new money into the system.

Just my two cents though
Source(s):
http://www.federalreserve.gov/fomc/fundsrate.htm
Knowledge from mass studying for a Macroeconomics final covering this subject

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The simple answer is that one is set by the Fed (fed fund) and the other by the market (mortgages)
Source(s):
http://www.frbsf.org/education/activities/drecon/2002/0206.html

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profit
Source(s):
its obvious

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