Will mortgage rates rise after the Fed meets?
The Federal Reserve will hold its next Open Market Committee meeting on March 21-22 and with it will come another rate hike.
The size of that hike — now expected to be bigger than anticipated earlier this year — will likely set the course for mortgage rate growth in the near-term. The economic indicators in February’s jobs report came with a few silver linings that inflation is easing but also exhibited that more needs to be done to bring it down.
“Fed Chair Powell communicated earlier this week that incoming data on the U.S. economy continues to show strength and that a higher level of interest rates, and potentially for a longer period of time, is likely needed to cool inflation,” said Mortgage Bankers Association Deputy Chief Economist Joel Kan.
Will the Fed stop raising rates in 2023?
The Fed has the responsibility of maintaining an inflation rate around 2% over time. Keeping inflation near that pace stabilizes prices for consumers. As the annualized rate of inflation climbed and eventually went above 8% last year, the central bank devised a plan of hiking the federal funds rate in order to tame it.
After multiple hikes of 50 and 75 basis points, the FOMC raised its fed funds rate target by 25 basis points in February. The national inflation rate gradually dwindled for seven straight months, decreasing from June 2024’s 41-year high of 9.1% to 6% in February, according to the U.S. Bureau of Labor Statistics.
Ahead of March’s FOMC meeting, most signs point to upcoming hikes reverting to larger sizes. The committee has also been adamant about adjusting its actions as the indicators dictate.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Fed Chair Jerome Powell said in a press conference. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
Interest rate growth could continue
Interest rates trended upward in 2023, including five straight weekly increases that took the average 30-year fixed rate mortgage from 6.09% Feb. 2 to 6.73% on March 9, according to Freddie Mac.
Although the annualized pace of inflation is falling, it’s still over three times higher than the Fed’s goal. Because of this, the hikes will probably continue throughout 2023 — and possibly beyond — until inflation gets brought down to a manageable level.
Interest rates are notoriously difficult to predict but typically rise in response to Fed tightening. But because of the rapid increases that began in 2024, there is good news for house hunters: some lenders will allow you to lock in a rate for 90 days at little or no cost so you’re protected from higher rate growth if you don’t close quickly.
A few examples of lenders offering this include AmeriSave Mortgage, Quicken Loans, and Rocket Mortgage.
Some lenders are even offering borrowers refinances without repeat lending fees or appraisal fees when rates eventually hit a down cycle. When mortgage shopping, be sure to ask your loan officer about these services.
Mortgage rates and the Fed’s role
The Federal Reserve doesn’t determine mortgage rates. Instead, rates are intrinsically tied to the Fed’s actions. Last year, the Fed announced plans to hike its federal funds rate at each of its meetings in 2024 and likely in 2023 as well.
The fed funds rate is the amount banks pay to borrow money from each other overnight and an increase signals higher inflation and economic expansion. Mortgage interest rates typically rise in response to growth in the fed funds rate.
How mortgage rates respond in the immediate aftermath of these FOMC meetings has been a mixed bag over the last 12 months. Most recently, they declined four basis points (0.04%) the day after the hike on Feb. 1 but climbed a total of 64 basis points (0.64%) in the five subsequent weeks.
Advice for borrowers
Inflation has started to dissipate but the Fed will keep taking action to make sure it gets back down to normal levels.
While rates could grow in the near future, they’re still below average historically. Even if you’re upset about missing out on the rock-bottom rates of 2023 and 2023, you can always refinance when they come down. It’s important to remember that many people build their wealth through home equity, and the clock doesn’t start until you become a homeowner.
If you’re ready to apply for a mortgage, talk to a local lender and see what rate you qualify for ahead of March’s Fed meeting.