Fed makes another 75 point hike in July. Will mortgage rates follow?

Another historical rate hike

The Federal Reserve continues its fight against inflation with the second 75 basis point (0.75%) fed funds rate hike in the last two months.

The central bank wrapped up its July Federal Open Market Committee (FOMC) meeting with a unanimous vote to replicate what it did in June — matching its largest rate increase since 1994.

Several industry experts suspect lenders already baked this action into recent mortgage rate growth. However, interest rates jumped in the wake of every other hike this year. With three more FOMC meetings and anticipated hikes in store for 2022, borrowers should think about locking in a rate as soon as they can.

The Fed’s role and July’s FOMC meeting

Technically, the Federal Reserve doesn’t determine mortgage interest rates. Instead, mortgage rate movement is intrinsically correlated with the Fed’s policy actions.

At the conclusion of its July 27 FOMC meeting, the Fed announced its second consecutive federal funds rate target range increase of 75 basis points (0.75%). The central bank “anticipates that ongoing increases in the target range will be appropriate,” according to its press release and meets three more times in 2022.

The Fed’s actions come in direct response to elevated inflation, driven by the geopolitical and economic turmoil from Russia’s war on Ukraine.

June had the highest annual inflation rate since Nov. 1981 at 9.1%, according to the latest data from the Bureau of Labor Statistics. In its elevated level, inflation puts unilateral price pressures on the economy and “recent indicators of spending and production have softened,” Fed Chair Jerome Powell said in a press conference. The FOMC aims to bring the inflation rate back down to 2%.

How will mortgage rates respond?

Now, the question becomes whether mortgage rates will echo the Fed’s hike or if lenders already priced in the highly anticipated action the Fed telegraphed last month.

“Many economists and industry analysts believe that the market has already built in a fed funds increase of 75 or even 100 basis points, so it would be a surprise if there was any sudden jump (or drop) in mortgage rates,” said Rick Sharga, EVP of market intelligence at Attom Data Solutions.

“That said, comments from the Fed Chair have been known to send the market soaring — or spiraling — in the past, so it’s entirely possible that Chairman Powell may say something that changes this expectation.”

Expect rates to keep rising

If recent history serves as a predictor, it’s reasonable to expect mortgage rate growth in the coming weeks.

The Fed made a 25-point hike at its March FOMC meeting, a 50-point hike in May and a 75-point hike in June. The average 30-year fixed rate mortgage rose 25 basis points (0.25%), 17 basis points (0.17%) and 55 basis points (0.55%), respectively, immediately following those meetings, according to Freddie Mac.

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

What the Fed rate hike means for borrowers

Between the beginning of 2022 and July 21, mortgage rates surged from 3.22% to 5.54% and the Fed’s latest decision indicates further growth could come — with three similar hikes expected this year.

“Inflation continues to run too high, and the Fed remains committed to slowing it, even if it leads to a recession,” said Mortgage Bankers Association chief economist Mike Fratantoni.

If the Fed does pull out all the stops to cut down inflation, interest rates may not be as low as they are right now for the foreseeable future.

The FOMC meets again on Sept. 20-21, so the best time could be now if you want to take out a mortgage or refinance your current home loan.