Fed Makes 25-Point Hike in March. Is This Good News for Mortgage Rates?

A smaller rate hike

The Federal Reserve concluded its March meeting by matching what it did in February.

The central bank made a 25-basis point (0.25%) hike to the federal funds rate in its ongoing fight against elevated inflation.

Between meetings, Fed Chair Jerome Powell commented that larger hikes could be necessary to tame inflation. However, the committee adjusted its plan as the turmoil from Silicon Valley Bank’s collapse stirred economic uncertainty.

The Fed’s role and March’s FOMC meeting

Technically, the Fed doesn’t set mortgage interest rates. Instead, mortgage rates intrinsically correlate with the central bank’s policy actions.

The Federal Open Market Committee (FOMC) wrapped up its March 22 meeting with a 25-basis point (0.25%) target range increase to the federal funds rate. This move brings the federal funds rate to a range of 4.75% to 5%.

Industry experts originally speculated the FOMC would make a larger hike both this time around and over the rest of 2023. That was until Silicon Valley Bank’s collapse spooked investors and mortgage rates fell in the wake of the banking sector’s latest unrest.

“This was a “dovish hike,” as the commentary and economic projections suggest we may be at or near the peak fed funds rate for this cycle,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association. “With this move from the Federal Reserve, MBA is holding to its forecast that mortgage rates are likely to trend down over the course of this year.”

The central bank noted in a press release that it will “closely monitor incoming information and assess the implications for monetary policy,” as well as being prepared to adjust their stance if certain risks emerge.

The FOMC’s goal is to bring the average annual rate of inflation to 2% over the long-term. After surging to a 41-year high of 9.1% in June 2022, inflation gradually came down every month since, most recently reaching 6% in February 2023, according to the Bureau of Labor Statistics.

How will mortgage rates respond?

The banking sector’s latest unrest frightened investors and mortgage rates fell following Silicon Valley Bank’s collapse.

With this smaller-than-anticipated hike, interest rates could continue declining until there’s more certainty in the financial markets. Interest rates typically rise when the fed funds rate increases.

Although, rate movement immediately following the last year of FOMC hikes has varied. Most recently, the average 30-year fixed-rate mortgage (FRM) decreased four basis points (0.04%) the day after the hike on Feb. 1 but climbed a total of 64 basis points (0.64%) in the five subsequent weeks, according to Freddie Mac.

The day following the FOMC’s last two 75-basis point hikes, they jumped 27 basis points (0.27%) in September but dropped 13 basis points (0.13%) in November. After December’s 50-basis point hike, they inched down two basis points (0.02%).

Further, the Fed will continue to run off its balance sheet of Treasury holdings and mortgage-backed securities (MBS). These actions typically put upward pressure on interest rates.

What the Fed rate hike means for mortgage rates

While more fed rate hikes will likely be made until inflation gets under control, the FOMC’s latest action could point to a downtrend for interest rates.

Many economic indicators point to the U.S. entering a recession in 2023 and mortgage rates to decline overall. Although, notoriously volatile interest rate movements can be hard to predict and any number of events can cause a rapid swing.

Instead of trying to time the market, locking in a mortgage now will start your home equity clock and help build your personal wealth. You can always refinance if and when rates decrease, and some lenders are waiving future refi fees if you take out a loan with them.

The next FOMC meeting comes on May 2-3, 2023, so the best time to take out a mortgage could be now.