Fed Chair Jerome Powell
Source: Getty

How Will a Fed Rate Hike Impact Mortgage Rates?

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Jan. 11 2022, Published 9:57 a.m. ET

According to Mortgage News Daily, the average rate on a 30-year mortgage hit 3.64 percent on Jan. 10 after rising sharply for the last week. What was the trigger? In the week ending Jan. 7, the Fed announced that it would offload mortgage-backed bonds from its balance sheet sooner than expected. These rates are impacting potential homebuyers. How does the Fed impact these rates and will a Fed rate hike affect mortgages?

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Mortgage rates haven't been this high since early 2020. They're expected to keep trending higher. Mortgage Bankers Association economist Joel Kan stated that the average 30-year fixed-rate mortgage will jump to 4 percent by the end of this year due to strong economic growth. The basic rule for mortgage rates also remains the same—supply and demand. Inflation, the economic growth rate, the federal reserve monetary policy, and the bond market operations all impact rates.

When is the next Fed meeting on interest rates 2022?

The Fed will hold eight meetings in 2022. The first meeting in 2022 is scheduled to be held on Jan. 25–26. The Fed’s current benchmark overnight borrowing rate is currently anchored in a range between 0 percent and 0.25 percent. In its December policy meeting, the Fed has forecast three rate hikes in 2022.

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fed rate hike
Source: Federal Reserve Twitter

However, given the consistent inflationary pressures, Goldman Sachs expects the Fed to tighten even more with four hikes forecasted in March, June, September, and December. JPMorgan CEO Jamie Dimon thinks that the Fed might have to raise rates more than four times to tame high inflation.

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Most of the analysts don’t see the Fed raising rates before its March policy meeting. St. Louis Fed President James Bullard also mentioned recently that Fed could raise interest rates as soon as March. The meeting is scheduled for March 15–16.

How does the Fed impact mortgage rates?

The Fed doesn’t impact the mortgage rates directly but it has a lot of tools that influence mortgages rates in a number of ways. The Fed’s tools include QE (quantitative easing) or tightening, the federal fund rate, and open market operations among others.

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The Fed can increase or decrease the money supply in the system through its policies. For example, through QE between 2008 and 2014, the Fed resorted to QE. This encouraged banks to lend money easier, which kept mortgage rates low. Through open market operations, the Fed buys and sells government bonds in the open market, which creates or absorbs the money supply in the system.

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A Fed rate hike has a ripple effect on mortgages.

The most effective tool the Fed has is the FFR (federal fund rate), which is the short-term interest rate at which U.S financial institutions lend money to each other overnight. The Fed sets a target for this rate and in the process, it impacts all the other rates, including short and long-term interest rates.

As the credit becomes dearer for the banks with a hike in FFR, they tend to pass it on to their customers. This causes the interest rate on bank borrowings, including consumer and mortgage rates, to go up. A Fed rate hike creates a ripple effect that ultimately impacts mortgage rates.

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