What the Fed Rate Hike Means for You
The Fed hiked their Fed funds rate by .75 today, bringing their borrowing rate up to a 2.25-2.5% range. This comes on the heels of years of the borrowing range being 0-.25%, so the increase is substantial, even with the borrowing rate remaining relatively low. Each time the Fed raises rates, there is some confusion about what it means, both immediately and more long term.
The immediate impact of the Fed funds rate will mainly be more expensive borrowing by banks, which in many cases will be passed along to consumers. Debts tied to the "prime" rate, such as credit cards and home equity lines of credit (HELOCs) will become more expensive by the same margin as the Fed increase (.75). Monthly payments on credit card bills and those carrying HELOCs will increase almost immediately. For mortgage rates, the immediate impact was a positive move, with rates coming down as a reaction to the Fed move.
Mortgage rate movement is often confusing as it seems odd that when rates are increased, mortgage rates fall, but it's important to note why the Fed is hiking rates. A Fed rate hike is a tool our central bank has to curb inflation. Since high inflation causes mortgage rates to rise, the efforts to bring inflation down tend to have the effect of lowering mortgage rates. This is what we've seen since the Fed's last major rate hike in June. Rates have come down from their June highs, and have continued to improve through today's rate hike.
Longer term, the Fed rate hike is likely to put a further damper on the economy, because as borrowing becomes more expensive, spending tends to slow down and capital is removed from the markets. This is why, historically, Fed rate hikes are usually followed or coincide with recession. In order to halt inflation, actions are taken to slow the economy. So while you'll see rates on some products spike immediately, and mortgage rates should come down (while they'll ebb and flow their way there on a daily basis), in the coming months, it's likely the economy will see a slowdown.
For those curious about the impact on the real estate market, with mortgage rates coming down, it should help ease the affordability issues that rising rates have created in 2022. Couple that with an increased amount of housing inventory, and for the first time in over 2 years, buyers may see attractive rates and have inventory levels present opportunities that may exist without multiple bids, bidding wars, and a market that heavily favors sellers. However, buyers should also note that falling rates should bring more buyers to market, so it's important to act quickly and take advantage of recent inventory spikes in many markets.
Each time the Fed hikes rates, the results are similar, and the next hike is expected to come in September, so it will be important to keep an eye on the jobs reports and inflation reports that are released between now and then, as they'll hold some clues as to how much the next Fed rate hike will be.
Do you have questions about the Fed rate hike, or anything else mortgage or real estate related? You can ask an expert here for a close to immediate response!
Comments(17)