The Fed has once again hiked the Fed funds rate, this time with a .25 hike announced today. This brings the Fed rate to 5.5%, the highest level in 22 years, signaling tighter credit, more expensive borrowing, and more pressure on banking profitability as the Fed continues to wage war on inflation.
The Fed rate hike is a move to increase the Fed funds rate - that is, the rate at which banks borrow from the Fed and each other - and not the rate borrowers/consumers pay. When the Fed raises their rate, it's a move designed to curb inflation by restricting the movement of money and borrowing. The move has a direct impact on financial vehicles tied to the 'Prime' rate - so your financial vehicles with an interest rate of "prime +/-" (think credit cards, home equity lines of credit) will see an immediate impact, moving in the same direction and same amount as the Fed funds rate.
Mortgage rates, on the other hand, tend to move in opposition of the Fed moves. This is because the Fed rate hikes tend to bring down inflation, and mortgage rates tend to move in the same direction of inflation (which is why we have the high mortgage rates we see today; a direct result of inflation spikes and heightened inflation over the past 18 months). As the Fed fights to bring inflation down, their fight should result in lower mortgage rates, too...eventually.
In the current market, mortgage rates remain stubbornly high because inflation remains stubbornly high, and despite some cracks appearing in the surface of the economy, jobs numbers have been solid and some areas of the economy have continued to see high levels of inflation (have you been to the grocery store recently??). There are also large scale sales of mortgage backed securities (MBS) as banks struggle to raise capital (to meet capital requirements placed on them, banks will sell assets, with some of those assets today being mortgage backed securities) - the increase of MBS in supply puts downward pressure on pricing for MBS, resulting in higher rates.
The .25 change to the Fed funds rate today was expected, so market impact and reaction was minimal. There are 2 sets of inflation and employment reports between now and the next Fed meeting in late September, and those numbers will likely indicate whether the Fed will continue to hike rates or whether they'll begin to ease up on monetary policy.
This content is a synopsis of commentary found at https://www.jmloans.com/the-fed-rate-increases-25/