Will Interest Rates Go Up or Down in 2023? Projections, Explained

After labeling inflation as "transitory," the Fed has started treating it as something that needs immediate attention. The Fed has raised interest rates three times so far this year by 25, 50, and 75 basis points in March, May, and June, respectively. According to many experts, the Fed waited too long to raise interest rates. Now, it might not be able to control inflation without putting the U.S. economy into a recession. Will interest rates go down in 2023?

The hotter-than-expected inflation in May has forced the Fed's hand even further and it raised the rates by the most since 1994 at one meeting. The inflation pressures have been fanned by supply and demand imbalances, high energy prices, and the Russia-Ukraine war. These pressures don’t seem like they will go away anytime soon.

After the Fed’s meeting in June, the dot plot showed that the median year-end projections of the committee members are 3.4 percent, 1.5 percent above the March 2022 dot plot. This would mean many more rate hikes in 2022 as the dot plot calls for another 1.75 percent rate hike in the year. If inflation doesn't drop significantly by the end of the year, the Fed might need to raise rates much more in 2023 than what the dot plot currently calls for.

To contain inflation, rate hikes could continue in 2023, with the median projection from committee members raised to 3.8 percent for the end of 2023, up from 2.8 percent in March. While some people think that the Fed might have to cut its rate cycle short due to the risk of the economy drifting into recession, the committee seems determined to bring inflation under control and achieve a soft landing at the same time. This will be a challenging feat to achieve, to say the least.

Mortgage rates are at multi-year highs and are set to go higher as the Fed continues to raise rates. The 30-year fixed-mortgage rate is averaging around 5.8 percent, which is lower than the last few weeks but it's the highest it has been since late 2008. The dramatic rise in rates in the last year is clear from the fact that in June 2021, the average rate for a 30-year fixed-rate mortgage was just 2.98 percent. The current mortgage rates are far above the projections.

While the current predictions are everywhere, The Mortgage Bankers Association June forecast predicts 5 percent at the end of 2022 and then a gradual drop to 4.4 percent by 2024. National Association of Realtors Chief Economist Lawrence Yun also sees mortgage rates topping 5.5 percent for a few months and then coming down. The future rate hikes by the Fed might not have a dramatic impact on mortgage rates. Most of the mortgage rate change from the expected Federal Reserve monetary policy change is already priced in.