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Why Did Mortgage Interest Rates Just Increase Again?


Why Did Mortgage Interest Rates Just Increase Again?

Home borrowing costs are continuing to rise wake of the Federal Reserve making another aggressive step to battle high inflation.

As expected, the central bank raised its benchmark Fed Funds Rate by an aggressive .75% at its meeting on September 21st. This is the fifth time the rate has been raised this year.

The Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. The main tool the Fed uses to curb inflation is hiking its benchmark Fed Funds Rate.

During his press conference, Fed Chair Jerome Powell reiterated that the Fed is “strongly committed” to fighting inflation, which remains near 40-year highs and well above their 2% target. Consumer prices were 8.3% higher in August than they were a year earlier, according to the Bureau of Labor Statistics.

After the Fed’s last significant rate hike In July, we wrote about how long-term (30-year fixed) interest rates actually came DOWN in response because the market had already anticipated the increase. So why did rates move in the opposite direction this time?

More Fed Rate Increases Are Coming

During their meeting, the Fed indicated it “anticipates ongoing increases in the target range will be appropriate” to achieve its goals of lower inflation and maximum employment. They now expect an additional 1.25% interest rate increase this year.

The Bond market (which is what determines mortgage rates) did not react positively to the Fed’s projections. Why? Because it gave the impression that the Fed does not have a handle on inflation.

This is why mortgage interest rates increased so much in the wake of this announcement. When the Fed said they intend to continue on an aggressive path to increase rates in order to fend off inflation, the bond markets took this as an admission by the Fed that they don’t have a handle on inflation, so rates shot up as a result.

Remember, INFLATION is what drives mortgage rates higher. This is because the people/entities that buy and invest in mortgage bonds require a higher rate of return when purchasing power is being eroded by inflation. The Fed Funds rate change is just a symptom of the problem, meaning the Fed raises that short-term rate to fight inflation.

When Will Mortgage Rates Fall?

Mortgage rates will fall when inflation comes down. 

High inflation rates usually indicate an impending recession, as businesses react to higher costs by reducing production and increasing prices. And when the Federal Reserve takes action in the form of more rate hikes to curb rising inflation, it usually helps trigger a recession.

But there is no reason to panic. Recessionary periods have been a common occurrence over the past century and have produced attractive opportunities for long-term investors (like those looking to buy homes).

A recession will also bode well for mortgage rates. As you can see in the chart below, whenever the economy slows down, mortgage rates decrease in response:

Mortgage Rates & Recessions

The Bottom Line

Mortgage interest rates shot up last week because of the Fed’s announcement that they strongly anticipate more rate hikes in the future. These hikes are going to increase the likelihood of a recession, which historically has always led to lower interest rates.

If you are in the market for a home today but are concerned about high rates, we would love to help you find a mortgage program that you can afford, or help you prepare to purchase as soon as the time is right for you.

Fill out the form below to request a meeting with one of our mortgage advisors and start putting a plan together to build wealth through homeownership.

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