Recent Federal Reserve Interest Rate Increases in Response to Inflation

Economic Outlook Going Into the New Year

Last Wednesday, the Federal Reserve raised its benchmark interest rate by 50 basis points, taking it from 4.25% to 4.5%. This change in the benchmark interest rate was expected beforehand by economists across the nation and takes rates to their highest level in 15 years. The good news about this interest rate increase however is that it is the first increase in recent months at just 50 basis points instead of 75. This decision was more than likely due to the information obtained from the previous two month’s Consumer Price Index reports (CPI), which show inflation slowing down faster than was predicted. The CPI reports, according to their website, “measure the average change over time in the prices paid by urban consumers for a market basket of consumer goods”. In today’s blog, we’ll discuss what the benchmark interest rate is, how it affects mortgage rates, and what the Federal Reserve sees for the future in 2023.

What is the Federal Reserve's Benchmark Interest Rate?

The benchmark interest rate that everyone is talking about when they mention the Federal Reserve raising interest rates is the federal funds rate. The federal funds rate is set by the Federal Open Market Committee (FOMC), which examines the factors that affect the U.S. economy, including the labor market, inflation, etc. The federal funds rate is what big banks use to borrow money from each other in order to make sure that they consistently have enough real money in their reserves as required by the government. It’s important to note that these banks are not actually required to use the federal funds rate as their interest rate when lending each other money, it is set as more of a guideline for these banks. The average of all of the interest rates between banks lending each other money is known as the effective federal funds rate, which can be helpful to compare to the actual federal funds rate. Last Wednesday was one of eight meetings the FOMC has every year to determine the federal funds rate, after which the chair of the Federal Reserve, currently Jerome Powell, will hold a press conference to discuss the current rates and field questions.

How Does the Federal Funds Rate Affect the Economy & Mortgage Rates

While the federal funds rate does not directly affect mortgage rates, it does impact banks, which then impact the 10-year Treasury yield, which is the rate that impacts mortgage rates. Therefore, the mortgage market pays close attention to what the Federal Reserve does with their interest rate and can adjust mortgage rates based on how they see fit in response. For example, the Federal Reserve said that because of the pandemic in 2020, they would keep rates extremely low for the foreseeable future, and mortgage rates dropped significantly. During this year, however, with economic troubles and rate increases on the horizon earlier in the year, mortgage rates increased in response. The biggest determinant of what your mortgage rate looks like is supply and demand, and the current level of inflation in the market. The actual supply and demand of housing has a large impact on mortgage rates, as lenders will increase rates when there is an abundance of business, and decrease rates in order to attract buyers when there are fewer people looking to purchase a home. Inflation is also a large determinant of mortgage rates, and especially in today’s market where inflation is the chief concern of the Federal Reserve. When inflation is higher, mortgage rates will typically follow, and vice versa.

What the Federal Reserve Expects Going Into 2023

Looking forward to 2023, the best way to anticipate what the Federal Reserve will do in the upcoming year is to look at Jerome Powell’s latest statements regarding the Federal Reserve’s policy. Chair Powell, discussing the latest increases to the federal funds rate and their outlook going forward said, “My view and my colleagues’ view is that this will take some time. We have a long way to go to get back to price stability”. He continued to say, “It’s our judgment today that we’re not at a sufficiently restrictive policy stance yet.” 17 out of the 19 committee members that determine the federal funds rate have predicted that rates will climb to or above 5 percent. While that news might seem extremely negative, it’s important to consider where mortgage rates are at this point, actually staying stable in the mid-6% range.  In addition, considering that the CPI reports mentioned above show that inflation has been lower than expected in the past two months, this news shows that there is the possibility of light at the end of the tunnel.

What Does This Mean For You?

While rates today are significantly higher than they were previously during the pandemic, they are still affordable when considering the history of mortgage interest rates overall. We will not see the pandemic mortgage rates for quite some time, but that doesn’t mean that housing is unaffordable or out of reach for the average American. Now is the time to lean into your Realtor and his/her recommended lenders to explore programs and shop for the best rate available to you. Experienced Realtors have worked with multiple lenders before and will be familiar with their programs and the best way to get you a competitive mortgage rate. If you would like to learn more about how I can guide you through the mortgage application process, contact me at (404) 576-8515 , or by filling out the contact form below!