Will Mortgage Rates Go Up After the December Fed Meeting?

Will mortgage rates rise after the Fed meets?

The Federal Reserve will hold its next Open Market Committee meeting on Dec. 12-13. As always, we want to know if it’s coming with a rate hike.

From May to October, the annualized inflation rate moved between 3% and 4%, with the central bank holding a long-term goal of 2%. The Fed decided to skip a hike at both its September and November meetings and many experts anticipate more of the same in December.

“Slower inflation, and financial markets anticipating the potential end of the Fed’s hiking cycle, are both behind the recent decline in [interest] rates,” said Joel Kan, deputy chief economist at the Mortgage Bankers Association.

Will the Fed stop raising rates in 2023?

The Fed has the responsibility of maintaining an inflation rate around 2% over time. Keeping inflation near that pace stabilizes prices for consumers and aids affordability.

Once the annualized rate of inflation climbed above 8% in 2022, the Federal Open Market Committee (FOMC) devised a plan of hiking the federal funds rate to tame it.

The national inflation rate gradually declined for 12 straight months — from June 2022’s 41-year high of 9.1% to 3% in June 2023, before inching up to 3.7% in September, according to the U.S. Bureau of Labor Statistics. During this time, the Fed adjusted its tightening policy. Most recently, the central bank made hike fed funds rate target went from hikes of 50 and 75 basis points, to 25-basis-point hikes in May and July, while skipping hikes altogether in June, September and November.

The FOMC could always reverse course, but many experts anticipate another hike pause at its December meeting.

A Reuters poll showed 97 out of 102 economists surveyed believe the Fed is through with hikes for this cycle.

“With inflation and inflation expectations continuing to move toward the Federal Reserve’s 2% target for inflation, a Fed policy pivot becomes more likely, if only to prevent monetary policy from becoming more restrictive and engineering an economic downturn,” said Orphe Divounguy, senior macroeconomist at Zillow Home Loans.

Interest rate growth could continue

Interest rates trended up through the first 10 months of 2023, with the average 30-year fixed mortgage ranging from 6.09% to 7.63%, according to Freddie Mac. Then, November came with relief and the 30-year FRM ended the month at 7.22%.

Although the annualized pace of inflation is falling, it’s still above the Fed’s goal. Because of this, more hikes and tightening monetary policies could continue until inflation gets brought down to a normalized level. Interest rates are notoriously difficult to predict but typically rise in response to Fed tightening.

Due to the rapid rate growth we saw in 2022, some lenders will allow you to lock in a rate for 90 days at little or no cost so you’re protected from higher rates if you don’t close quickly. A few examples of lenders offering this include AmeriSave Mortgage, Quicken Loans, and Rocket Mortgage.

Some lenders are even offering borrowers refinances without repeat lending fees or appraisal fees when rates eventually hit a down cycle. When mortgage shopping, be sure to ask your loan officer about these services.

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.

How mortgage rates respond in the immediate aftermath of these FOMC meetings has been a mixed bag over the last year. Most recently, they rose three basis points (0.03%) the day following July’s 25-point hike, inched up one basis point (0.01%) following September’s pause while declining three basis points after November’s pause.

Advice for borrowers

Bringing down inflation and keeping it there continues to prove difficult — especially with mortgage rates at 20-year highs.

While rates could grow at any point, they’re still below average historically. Even if you missed out on the rock-bottom rates from the last couple years, you can always refinance once they eventually hit a down cycle. It’s also important to note that many people build wealth through home equity.

If you’re ready to apply for a mortgage and become a homeowner, speak with a local lender to see what kind of loan and interest rate you can qualify for ahead of December’s Fed meeting.