Fed Skips Rate Hike in September. Is This Good News for Mortgage Rates?

No Fed hike in September

The Federal Reserve concluded its September meeting by foregoing another rate hike.

Despite the inflation rate creeping up for two straight months, the central bank voted to hold the federal funds rate steady with job growth slowing and “economic activity expanding at a solid pace.”

“We expect that inflation will continue to drop closer to the Fed’s target, the job market will continue to slow, and that mortgage rates should begin to reflect that the Fed’s moves in 2024 will be cuts – not further increases. This should provide some relief in terms of better affordability for potential homebuyers,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association.

The Fed’s role and September’s FOMC meeting

The Fed doesn’t technically set mortgage interest rates. Multiple factors determine how mortgage rates move, but they do intrinsically correlate with the central bank’s policy actions.

After making hikes in 10 out of the past 11 meetings, the Federal Open Market Committee (FOMC) concluded its Sept. 20 gathering by keeping the federal funds target range static. While this hike pause was mostly expected, the fight against inflation isn’t over.

While 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 — it rose from 3.2% in July to 3.7% in August, according to the U.S. Bureau of Labor Statistics. The FOMC’s objective is to bring inflation to around 2% over the long term.

“The worst thing we can do is to fail to restore price stability, because the record is clear on that,” Fed Chair Jerome Powell said in a press conference. “If you don’t restore price stability, inflation comes back. And you can have a long period where the economy is just very uncertain, and it’ll affect growth.”

The Fed will base its next moves on the lagging effects of its past hikes and their latest pause. The FOMC holds the caveat that it will adjust its future policy actions as necessary. The FOMC’s next meeting comes on Oct. 31-Nov. 1.

How will mortgage rates react?

Interest rates trended upward throughout the summer, shooting above 7% and reaching a 22-year high in August. However, September is showing signs of relief and this Fed action could help rates decrease.

Most recently, the average 30-year fixed-rate mortgage (FRM) fell two basis points (0.02%) immediately following June’s FOMC meeting and rose three basis points (0.03%) after July’s hike, according to Freddie Mac.

Interest rates typically rise alongside increases to the fed funds rate and run off of balance sheet holdings. In its statement, the FOMC described financial markets “sound and resilient” and the currently tight credit conditions are “likely to weigh on economic activity, hiring, and inflation.”

The FOMC’s pause in hiking strategy coupled with those economic indicators signal they believe inflation and interest rates should start to gradually dissipate.

Should you lock in a mortgage rate?

Mortgage rates are volatile by nature and get impacted by many factors.

While the FOMC’s latest action indicates a downward trajectory for interest rates, there are no guarantees. Although the average 30-year FRM stands above 7%, you can negotiate your rate down, as well as refinance when they fall. And being a homeowner comes with the benefit of building equity.

If you’re ready to take the next step, reach out to a mortgage professional to see what rate and loan type you qualify for.