Fed Hikes and Mortgage Rates Explained

Fed Hikes and Mortgage Rates Explained

How will the Fed's recently announced quarter-point hike to the Fed Funds Rate affect mortgage rates? The answer may surprise you.

The Fed Funds Rate is not the same as a mortgage rate because it can change from one day to another, while mortgage rates can be in effect for 30 years.

Mortgage rates are primarily driven by inflation, which erodes the buying power of the fixed return that a mortgage holder receives. When inflation rises, lenders demand a higher interest rate to offset the more rapid erosion of their buying power.You probably know that inflation has been rising of late, and as a result, so have mortgage rates.

When the Fed hikes rates, they are trying to slow the economy and curb inflation. If successful in cooling inflation, mortgage rates will decline. History proves this during rate hike cycles for the past 50 years.

However, the Fed may also reduce its holdings of Mortgage Bonds, which can cause some interest rate volatility.

I'm here to help you navigate through these uncertain times and find you the best opportunities for a purchase or refinance.

The Federal Reserve & Real Estate

We achieved 3.8% unemployment which is just off the historical 3.6% unemployment target.  This while having 10.3 million job openings.  The economy has been stimulated into a revival giving American's the ability to find their passion, start a business, create a gig.  Meanwhile, businesses are trying to keep up with demand and posting positions while raising wages. The participation rate is rising as more people come back to work as the PPP and stimulus funds are spent.  Even 55+ workers are coming back.

So while the Fed finished quantitative easing (last purchase was March 15th); is increasing the Fed Rate (.25% this week); and kicking off quantitative tightening (i.e. the roll off of their balance sheet), they need to make sure they watch unemployment.  Higher short-term interest rates limit business reinvesting and can lead to higher unemployment.  When unemployment hits the bottom and turns up as businesses who were looking to hire are now laying off; the recession has begun. This is evidenced in the chart below.  See every recession begins with an uptick in unemployment.  It is not a leading indicator, it is the starting line gun.

Rates Settled In With The 0.25% Increase

While the markets reacted first to the comments of the quantitative tightening with the 10-Year rising, for the two days that followed, the 10-year settled into a sideways move allowing the 30 yr fixed to drop slightly on Friday.  The 10-Year Treasury finished the week landing at 2.15%, meaning rates still above 4%.

How high will rates go?  

Russia is not done invading Ukraine.  Supplies such as wheat, corn, gas, oil, coal, neon, steel, and more will continue to strain inventory.  The PPI (wholesale inflation) is at a whopping 10%.  CPI before the Russia conflict was a high 7.9%.  PCE (the Fed's preferred measure of inflation) is 6.06%.  These numbers will continue to go up before they come down.  These indicators were expected to peak in March due to the pandemic induced supply chain issues.  But new global developments will push prices up further and spur American companies like Samsung who is developing their own $17 billion dollar microchip plant in Texas.

While the Fed is trying to fight inflation, expect a lot of volatility in rates.  Rates will improve on Fed rate hikes, get higher on worsening developments in Russia, get higher with quantitative tightening, get lower on peace talks, and get lower still in a recession.

Do not let your buyers wait to buy on the dips.  Robinhood investors love that strategy.  But homebuyers only loose!  They lose today's prices and can easily refinance when rates do dip, because as rates go.. we are still at historical lows!

I'm here to help you navigate through these uncertain times and find you the best opportunities for a purchase or refinance.

Sources: MBS Highway, Nicole Rueth at www.theruethteam.com, Freddie Mac at www.FreddieMac.com