In response to rising inflation, the Federal Reserve raised rates another 0.75% at its Wednesday afternoon meeting.
This marks the second straight month the Fed has raised rates by three-quarters of a percentage point. The funds rate is now in the range of 2.25% to 2.5%.
Opinions circulated for months on whether the Fed would raise rates a whopping 1 percentage point in light of inflation’s increasing pressures on the economy, but that wasn’t the case.
Regardless, another rate hike will leave an impact on interest rates. But what about mortgage rates?
The Fed doesn’t set mortgage rates, and there’s no direct link between the funds rate and mortgage rates, experts say.
Mortgage rates are more closely tied to the 10-year U.S. Treasury yield, which is affected by market forces rather than the Fed rate.
However, mortgage rates usually are indirectly affected by the funds rate.
For example, after the last 0.75% hike, economists say mortgage rates spiked briefly before settling down to current levels.
According to Jacob Channel, LendingTree’s senior economist, mortgage lenders often will factor upcoming Fed rate hikes into their mortgage rates before the Fed officially makes its announcement.
Channel told MarketWatch that some lenders may feel “pressured” to raise hikes due to high inflation and economic uncertainty.
As a result, by the time the announcement has been made, rates may already be at their new highs but will settle down as the economy settles.
Economists believe that even if mortgage rates do rise in response to the Fed’s hike, they likely will not rise much above 6%. And if they do, it will be short-lived.
NerdWallet expert Holden Lewis told MarketWatch that another rate hike could cause investors to fear an incoming recession, which would naturally push mortgage rates down.
Experts say mortgage rates often are impacted by anticipation, meaning the fears of what is about to happen can send them up or down depending on the circumstances.
As a result, by the time an event actually happens, mortgage rates usually already have adjusted.
Mortgage News Daily chief Matthew Graham agrees. He wrote that mortgages “don’t care” about the Fed funds rate because the Fed only meets eight times per year, while mortgage rates are moving every day.
Mortgages and the rest of the bond market move well in advance of the Fed’s moves, he says.
Experts say the bottom line for those still seeking a great mortgage rate is to focus instead on their personal finances rather than external market influences.
Despite more and more hopeful buyers getting priced out of the market with rising rates and home prices, a great rate is within reach if the buyers are willing to put in the work.
According to financial experts, this means focusing on paying down high-interest debts, saving for a down payment, and shopping around for the best rates.
Photo by Matthias Groeneveld