Will mortgage rates go up after the February Fed meeting?

Will mortgage rates rise after the Fed meets?

The Federal Reserve will conduct its next Open Market Committee meeting on Jan. 31- Feb. 1 and another rate hike should be anticipated.

However, the size of the hike — or whether one occurs at all — could be smaller than original projections as decades-high inflation continues to decline.

“A slew of incoming economic data point to falling inflation and a rapidly slowing U.S. economy, which investors suspect will cause the Federal Reserve to pause, or even reverse, their program of interest rate hikes,” said Orphe Divounguy, senior macroeconomist at Zillow Home Loans.

Interest rate growth could temper

The Fed has a duty to keep inflation around 2% over time in order to stabilize prices for consumers. Back in May, the central bank realized the country’s high annualized inflation rate wasn’t transitory and deployed its plan to tame it.

It raised the target federal funds rate at each of its FOMC meetings — including four consecutive record-high hikes of 75 basis points each. Then in December, the FOMC made a smaller hike of 50 basis points.

The national inflation rate gradually dwindled for six straight months, decreasing from June’s 41-year high of 9.1% to 6.5% in December, according to the U.S. Bureau of Labor Statistics.

Inflation is still about three times higher than the FOMC’s target and Fed Chair Jerome Powell stated that, “we have more work to do” in his previous press conference. With the rate of inflation moving in the right direction, the upcoming hikes should be milder, putting less upward pressure on mortgage rate growth.

Will the Fed stop raising rates in 2023?

Key economic indicators — like wage growth, the 10-year and three-month Treasury yield spreads, activity in the manufacturing and services sectors — contracted in December. These combined factors signal waning inflationary pressures and make a recession highly likely, Divounguy said.

While Powell noted the central bank may reduce the size of rate hikes if inflation continues to dissipate, the annualized pace is still far from its goal. Because of this, the hikes will probably continue throughout 2023 — and possibly beyond — until inflation gets to a manageable level.

“It seems like most of the market is anticipating a 25-basis point hike at the February 1 meeting, but wouldn’t be shocked by a 50-basis point hike. Anything more than that, or an unexpectedly bad inflation report could cause some panic in the financial markets,” said Rick Sharga, EVP of market intelligence at Attom Data Solutions.

Mortgage rates and the Fed’s role

The Federal Reserve doesn’t determine mortgage rates. Instead, rates are intrinsically tied to the Fed’s actions. Last year, the Fed announced plans to hike its federal funds rate at each of its meetings in 2022 and likely in 2023 as well.

The fed funds rate is the amount banks pay to borrow money from each other overnight and an increase signals higher inflation and economic expansion. Mortgage interest rates typically rise in response to growth in the fed funds rate.

Immediately after the FOMC meetings in June and September, the average 30-year fixed rate mortgage spiked 55 basis points (0.55%) and 27 basis points (0.27%), respectively. However, the average 30-year FRM fell 24 basis points (0.24%), 13 basis points (0.13%) and 16 basis points (0.16%) on the days following the July, November and December meetings.

Advice for borrowers

Interest rates more than doubled over the course of 2022 but trended downward since November. While inflation has started to dissipate, the Fed will keep taking action to make sure inflation gets back down to historic norms.

Mortgage rates typically grow in response to Fed tightening actions. Although, interest rates are notoriously difficult to predict and could fall like they did following the last few hikes. Regardless, they’re still below average historically and you can always refinance into a lower rate when they come down. Remember, homeownership is how many people increase their wealth and the sooner you secure a mortgage, the sooner you start building home equity.

If you’re ready to apply for a home loan, talk to a local lender and see what rate you qualify for ahead of February’s Fed meeting.