Fed Does Not Hike Rates in June. Is This Good News for Mortgage Rates?

Is the Fed finished raising interest rates?

The Federal Reserve concluded its June meeting by pausing its strategy it started in 2022.

The central bank decided to not hike its federal funds rate for the first time in over a year. Instead, it’s taking a wait-and-see approach in order to see if inflation keeps descending and the overall economy cools in the face of job market resiliency.

“With this muddled picture, it is not surprising that the Federal Open Market Committee (FOMC) held rates steady at its June meeting – but kept their options open for July and later this year,” said Mortgage Bankers Association Chief Economist Mike Fratantoni.

The Fed’s role and June’s FOMC meeting

The Fed doesn’t set mortgage interest rates. Mortgage rates hinge on several factors, but they do intrinsically correlate with the central bank’s policy actions.

After 10 consecutive hikes, the FOMC concluded its June 14 meeting by holding the federal funds rate target range static. The committee will instead “assess additional information and its implications for monetary policy” to bring inflation down to the 2% goal, according to its press release.

The national inflation rate gradually decreased for 10 straight months, from June 2022’s 41-year high of 9.1% to 4% in May 2023, according to the U.S. Bureau of Labor Statistics. Ahead of June’s meeting, Fed Governor Philip Jefferson said skipping a rate hike “would allow the committee to see more data before making decisions about the extent of additional policy firming.”

While only time will determine the Fed’s next moves, its median forecast showed two more rate hikes in 2023. Of course, the FOMC is prepared to make adjustments based on economic conditions and developments.

Fratantoni predicts the Fed will forego making more hikes this year.

“The threat of further hikes, baked in to medium-term rates today, will only further slow economic activity,” Fratantoni continued. “We expect that mortgage rates will drift down over the second half of the year as the economy slows and the Fed reacts accordingly by holding off on further rate hikes.”

The FOMC’s goal is to keep the long-term average annual rate of inflation near 2% and the next meeting comes on July 25-26.

How will mortgage rates react?

With debt ceiling negotiations creating uncertainty, interest rate movement mostly trended upwards since May’s FOMC meeting.

Since settling at 6.39% on May 4, the average 30-year fixed-rate mortgage (FRM) climbed to 6.71% on June 8, according to Freddie Mac.

Interest rates typically rise alongside increases to the fed funds rate and run off of balance sheet holdings. With this relatively small — and potentially 2023’s final — hike, mortgage rates could decline amongst the financial market uncertainty.

We’ve seen mixed results in the immediate aftermath for this series of rate hikes. Most recently, the average 30-year FRM decreased 18 basis points (0.18%) and four basis points (0.04%), respectively, the day after the hikes on March 22 and May 4.

Is it a good idea to lock in a mortgage rate?

The FOMC’s latest action signals a downtrend for inflation and likely the economy.

In turn, interest rates are expected to gradually fall over the remainder of the year. However, mortgage rate movements are highly volatile and depend on a multitude of factors. Trying to time the market typically isn’t financially prudent, but the sooner you lock in a mortgage, the sooner you start building home equity (and personal wealth).

If you’re ready to become a homeowner, reach out to a mortgage professional to see what rate and loan type you qualify for.