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

Will this be the last Fed hike of 2023?

The Federal Reserve concluded its July meeting by making another rate hike.

After taking a wait-and-see approach last month, the central bank resumed its monetary tightening policy by raising the federal funds rate range by 25 basis points (0.25%). This brought the range to its highest point since 2001.

“Housing affordability challenges continue to delay many potential buyers from entering the market. We do expect mortgage rates to trend down once the FOMC clearly signals that they have reached the peak for this cycle, as the reduction in uncertainty with respect to the direction of rates should narrow the spread of mortgage rates relative to Treasury benchmarks,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association.

The Fed’s role and July’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 followed by a pause in June, the FOMC concluded its July 26 meeting with a 25-basis point (0.25%) target range increase to the federal funds rate. With the committee “strongly committed to returning inflation to its 2% objective,” the hike comes with little surprise as the economy continues to expand.

The national inflation rate gradually decreased for 12 straight months, from June 2022’s 41-year high of 9.1% to 3% in June 2023, according to the U.S. Bureau of Labor Statistics. Ahead of July’s meeting, Fed Chair Jerome Powell said, “the committee clearly believes that there’s more work to do, that there are more rate hikes that are likely to be appropriate.”

Only time and economic indicators will determine the Fed’s next moves. As always, the FOMC is keeping its future policy options open to adjustments or more hikes as deemed necessary. The FOMC’s next meeting comes on Sept. 19-20.

How will mortgage rates react?

With inflation proving stubborn and the economy doing well, interest rate movement mostly trended upwards this summer.

Although the average 30-year fixed-rate mortgage (FRM) fell two basis points (0.02%) to 6.69% immediately following June’s FOMC meeting, it went as high as 6.96% on July 13, 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.

“The latest rate hike was mostly anticipated, limiting its immediate impact on interest rates, including mortgage rates. As a result, mortgage rates are likely to remain elevated until more evidence is available suggesting core inflation will continue to moderate,” said Orphe Divounguy, senior economist at Zillow.

We’ve seen mixed results in the aftermath for this year’s 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, with interest rates expected to gradually fall over the remainder of the year.

However, the notorious volatility of mortgage rate movements depend on a multitude of factors and attempting to time the market typically isn’t financially prudent. Additionally, 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.