Once again, in an effort to curb inflation, the Fed has announced another Fed Rate Hike to the tune of a .75 increase to the Fed Funds rate. This Fed rate hike brings the Fed funds target rate range to 2.25%-2.5%, and the increase was in line with expectations, resulting in minimal initial changes to equity and bond markets. What does all this mean? Read on…
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.