Josh Moody: What the Fed Interest Rate Increase Means For Local Homebuyers

I’ve heard that the Fed recently raised rates by .75%. Does this mean mortgage rates will go up by .75%?

The good news is, not necessarily. Since December, mortgage rates have increased by almost 100%, going from 3.25 on 12/31/2021 to over 6% as of 6/16/2022. Much of this increase was in anticipation of the Fed’s rate hikes, but the main cause of the rise in rates is due to uncontrolled inflation. When lenders are willing to lend for 30 years, they have to believe that inflation can be managed and controlled (if they lend money for 30 years at 3.5%, but inflation is at 7%, all of a sudden their 3.5% return isn’t worth much). Over the last few years, when inflation was around 2%-3%, mortgage rates stayed in the 2.5%-3.75% range. Now, with inflation rising to 8.6%, the mortgage rates are rising accordingly.

While most of the financial world was predicting the rise in rates, more of them are sure we have not seen the end of increases. Some figure that if we could get some type of handle on inflation, we could see mortgage rates moderate and settle in at the mid-fives. Others believe that if the Fed continues to raise rates as they have indicated they would, rates could continue up into the high sixes.

Mortgage rates are much more sensitive to changes in the inflation rate than they are to Fed rate changes. As the inflation rate changes, so will mortgage rates. The Fed’s actions are more centered around putting the brakes on inflation and an overheated economy which then would lead to lower mortgage rates.

So, with the Federal Reserve raising the Fed Funds rate, this indicates that they are actively trying to combat inflation. If they can get a handle on it, we will hopefully see mortgage rates settle or possibly decline. If they cannot, unfortunately mortgage rates may continue to climb. Let’s hope it’s the former!