How the Federal Reserve Impacts Mortgage Rates and Influences the Rate of Inflation
When you read about the housing market in the news, you might see something about a recent decision made by the Federal Reserve (the Fed). You may be wondering how the Federal Reserve impacts mortgage rates and what this means for you. But how does this decision affect you and your plans to buy a home? Here’s what you need to know. In short, understanding how the Federal Reserve impacts mortgage rates is key to making informed decisions in today’s market.
The Fed is trying hard to reduce inflation. And even though there have been 12 straight months where inflation has cooled, the most recent data shows it’s still higher than the Fed’s target of 2%:
While you may have been hoping the Fed would stop its hikes since they’re making progress on their goal of bringing down inflation, they don’t want to stop too soon and risk inflation climbing back up as a result. Because of this, the Fed decided to increase the Federal Funds Rate again last week.
As Jerome Powell, Chairman of the Fed, says:
“We remain committed to bringing inflation back to our 2 percent goal and to keeping longer-term inflation expectations well anchored.”
Greg McBride, Senior VP and Chief Financial Analyst at Bankrate, explains how high inflation and a strong economy play into the Fed’s recent decision:
“Inflation remains stubbornly high. The economy has been remarkably resilient, and the labor market is still robust, but that may be contributing to the stubbornly high inflation. So, Fed has to pump the brakes a bit more.”
Even though a Federal Fund Rate hike by the Fed doesn’t directly dictate what happens with mortgage interest rates, it does have an impact. When considering how the Federal Reserve impacts mortgage rates, these decisions provide essential context.
“The federal funds rate is an interest rate that banks charge other banks when they lend one another money . . . When inflation is running high, the Fed will increase rates to increase the cost of borrowing and slow down the economy. When it’s too low, they’ll lower rates to stimulate the economy and get things moving again.”
So the Federal Reserve Impacts Mortgage Rates, but Does This Affect You?
In the simplest sense, when inflation is high, mortgage interest rates are also high. But if the Fed succeeds in bringing down inflation, it could ultimately lead to lower mortgage interest rates, making it more affordable for you to buy a home. It’s important to remember how the Federal Reserve impacts mortgage rates during periods of market change.
This graph helps illustrate that point by showing that when inflation decreases, mortgage interest rates typically go down, too (see graph below):
As the data above shows, inflation (shown in the blue trend line) is slowly coming down and, based on historical trends, mortgage rates (shown in the green trend line) are likely to follow. McBride says this about the future of mortgage rates:
“With the backdrop of easing inflation pressures, we should see more consistent declines in mortgage interest rates as the year progresses, particularly if the economy and labor market slow noticeably.”
Bottom Line
What happens to mortgage rates depends on inflation. If inflation cools down, mortgage rates should go down, too. Additionally, keep in mind how the Federal Reserve impacts mortgage rates when considering your financial strategy. Let’s talk so you can get expert advice on housing market changes and what they mean for you.
