The Fed funds rate is the rate at which the Fed lends money to banks, and banks lend money to each other, NOT the rate that consumers borrow at.

When the Fed raises the Fed funds rate, it is generally to fight inflation.  Beginning in early 2022, inflation began to skyrocket, and throughout 2022 and so far into 2023, the Fed has consistently raised their rates to curb inflation.  While inflation has slowed, recent data points to inflation being higher than the Fed’s target rate, and for this reason, rate hikes have continued into Q2 2023.  Future rate hikes will depend on the direction of inflation from here.

It’s important to note that mortgage rates are not directly tied to the Fed’s actions.  Since high inflation results in high mortgage rates, the Fed rate hikes often help bring mortgage rates down, since reductions in inflation lead to reductions in mortgage rates.  Some other financial products are, however, tied directly to the Fed funds rate.  The “Prime rate” for example, moves in direct correlation with the Fed funds rate, so credit card rates will move up in line with the Fed funds rate.

Since early 2022, the Fed has raised their Fed funds rate by a total of 5%.  That means credit card debt has become 5% more expensive for consumers to carry, and other types of debts have become more expensive as well.  Mortgage rates, though, have come down substantially since their highs seen in October 2022, despite additional Fed rate hikes.

The Fed has signaled that they’ll rely on data and economic figures to determine the future direction of the Fed funds rate, but most forecasts predict the cycle of rate increases is either at or near it’s end, as inflation numbers and economic conditions seem to be shifting.

Mortgage rates improved on the day, and have come down substantially from October highs and another recent spike in February.

For questions about the Fed rate hike, mortgage rates, or anything else housing or mortgage related, you can ask an expert here and get answers instantly!

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For mortgage rates

There’s a common misconception that the Fed raising rates with a Fed rate hike leads to higher mortgage rates, but it’s important to understand what drives mortgage rates.  The price of mortgage backed securities (MBS) are the only thing that directly move mortgage rates, and MBS often see an improvement (improving rates, aka bringing them down) when there’s a Fed rate hike.  Today was no exception.  The reason for this is that the Fed rate hike is a measure implemented to slow down the economy and to fight inflation.  High inflation is a major cause of increasing mortgage rates (and is one of a few reasons we’ve seen mortgage rates go up so much in 2022!), so the Fed’s actions should theoretically reduce inflation, helping mortgage bonds, and thus lowering mortgage rates.

In fact, since the Fed’s last rate hike in June, mortgage bonds have improved substantially, and mortgage rates have come down from their highs.

For other debts

Some debts are directly impacted by a Fed rate hike.  Home equity lines of credit (HELOCs), for example, are often tied to the prime rate, which moves in step with the Fed funds rate.  Because the prime rate goes up and down with each Fed rate hike, HELOC rates will move as well, and for that reason, rates on HELOCs will immediately go higher on the Fed announcement.  Other debts tied to the prime rate will do the same.  For this reason, consumers can expect their credit card payments to increase as most credit cards have their interest rates tied to prime.

For the broader economy

Fed rate hikes historically precede periods of recession.  The Fed’s action reduces inflation, but it also makes borrowing costs of financial institutions more expensive.  This tends to slow down borrowing and spending, which in turn slows down the economy.  In today’s marketplace the Fed has made it clear that fighting inflation is their #1 objecting, and the broader economy, while of concern, is being focused on less than reigning in stubborn, persistent inflation that was once thought to be “transitory”.

The Fed rate hike has many implications, but it’s very important to know that the Fed is NOT raising mortgage rates, and in fact, their actions typically lead to lower rates.  That’s important to understand today, because with mortgage rates spiking in early 2022, we’ve seen an increase in inventory on the market as many buyers have been forced to the sidelines.  Interest rates coming down could present a great opportunity for many buyers who now have less competition in the market and more inventory to choose from.  The Fed has also made it clear that their expectation is for more rate hikes throughout 2022 and beyond, so if the markets behave as expected, we may see some great opportunities with lower rates in the mortgage space in the months ahead.

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