Today, the Fed raised the Federal funds rate by .25, marking a full 5% increase in the fed funds rate since they began hiking rates in early 2022. It’s important to note what the Fed rate hike means for mortgage rates and other areas of the market.
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.
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