Fed makes fourth 75-point hike. Will mortgage rates rise?

Another historic rate hike

The battle against inflation rages on and the Federal Reserve hiked its fed funds rate by 75 basis points (0.75%) for the fourth consecutive time on Nov. 2.

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

The Fed has now hiked rates six times in 2022. Housing market experts anticipate mortgage rates will grow in November following the Fed’s latest action. With more hikes likely to come in order to bring down inflation, borrowers should look into locking in an interest rate soon.

The Fed’s role and November’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 Nov. 2 FOMC meeting, the Fed announced its fourth consecutive federal funds rate increase of 75 basis points (0.75%). The central bank “anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” according to its press release.

The Fed pointed to the “tremendous human and economic hardship” of Russia’s war on Ukraine for putting upward pressure on inflation.

June had the highest annual inflation rate since Nov. 1981 at 9.1% and that slowly tapered to 8.2% in September, according to the Bureau of Labor Statistics. The heightened level of inflation reflects pandemic-related supply and demand imbalances, as well as elevated food and energy prices, according to the Fed.

How will mortgage rates respond?

With the latest hike expected around the industry, borrowers will wait and see if lenders have already baked it into their rates or if more growth is coming.

The average 30-year fixed-rate mortgage (FRM) jumped 27 basis points (0.27%) after the September FOMC meeting, according to Freddie Mac. Since then, that average climbed to 7.08% as of Oct. 27.

“The combination of elevated mortgage rates and steep home-price growth over the past few years has greatly reduced affordability. The volatility seen in mortgage rates should subside once inflation begins to slow and the peak rate for this hiking cycle comes into view,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association.

Expect rates to keep rising

If we use recent examples as a crystal ball, mortgage rates are likely to continue increasing in the near future.

The Fed made 75-point hikes at its three prior meetings. Immediately following those meetings, the average 30-year FRM rose 55 basis points (0.55%), fell 24 points (0.24%) and rose 27 points (0.27%), respectively, according to Freddie Mac.

However, there is a silver lining for borrowers. While the Fed will keep tightening its monetary policies to reduce inflation, it hinted at a “possible slowdown in the pace of [rate hike] increases,” said Odeta Kushi, deputy chief economist at First American.

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

What the Fed rate hike means for borrowers

As inflation proves difficult to bring down, the Fed’s latest decision shows more interest rate growth could be coming. If the experts are right, you may not be able to lock in a lower rate for the foreseeable future.

“With inflation still running far too high, and the job market remaining strong, MBA expects the Fed to increase rates by another 75 basis points before holding them steady throughout 2023,” said Fratantoni.

The next FOMC meeting comes on Dec. 13-14, so now could be the best time to take out a home loan or refinance yours.