The most recent rate hike brings the Fed’s target funds rate (the rate which banks borrower from the Fed and each other) to a range of 3-3.25%, a full 3% higher than 0-.25% range we saw prior to inflation kicking in late last year.

This also moves the “prime rate” (a very important metric to the overall economy) up to 6.25%, also 3% higher than last year’s lows as the prime rate, unlike mortgage rates, does more in direct proportion to the fed funds rate.

What does this mean for mortgages and home financing?

The Fed’s moves are closely watched by mortgage bond traders (and mortgage bonds, or mortgage backed securities, are what directly influence our rates), and just as important as the Fed’s move on rates is their commentary after announcing their rate decision.  The market reaction to this Fed move was mortgage interest rates moving initially higher (opposite to the market reaction of the last Fed rate hike of the same amount back in June!), as the market’s seem to doubt the Fed’s ability to reign in stubborn inflation.

Historically, though, Fed funds rate increases are usually followed (sometimes quickly) by recession, which historically has brought rates back down to earth.  While no one has a crystal ball, with pending recession grabbing more headlines, it seems like history may repeat itself, but that remains to be seen as the Fed’s rate hike will typically take a few months to be absorbed and show it’s impacts in the broader economy.

What Does The Fed Rate Hike Mean For the Broader Economy?

With a Fed rate hike, the ‘prime’ rate increases, and many household financial products are tied to prime, most often credit cards and home equity lines of credit (HELOCs).  So these products will get more expensive and will likely be the biggest direct impact households will immediately see & feel.

Higher borrower costs tend to mean less borrowing and a slowdown to the broader economy, so over time the Fed rate hikes should reduce inflation, which is a good thing!  The negative side of the equation is that while reducing inflation, the economy usually slows and often ends up in recession.  With inflation hitting so many households in the wallet this year, though, the Fed’s primary concern is to reign in inflation and lower costs for US households.  If their actions do cause a recession and a spike in unemployment numbers, their focus will shift, but for now, we can expect the Fed funds rate to continue to increase and remain at higher levels until we start seeing inflation numbers come down.

Is Housing a Concern?

Housing is certainly seeing a shift in 2022 from the insanity of quickly appreciating values in 2020-2021, but inventory is still below historical levels, so the market has some room to absorb reduced demand without a huge impact.  Again, while no one has a crystal ball, the numbers seem to support strength in the housing market, even if we do see a slowing in appreciation or some slight depreciation in some markets.  The greater concern for the housing market is interest rates, which have hurt affordability in housing, as even with rising prices, low rates can keep housing payments down.  If we see rates drop as inflation comes down, it could bring more home buyers to market.

The Fed has states they plan to continue to raise rates until inflation shows sustained improvements, and they have made fighting inflation their primary focus for the short term.  What the overall impacts will be and the direction of the economy as a result of their actions remain to be seen, we’ll be sure to provide up to date info on the state of housing, rates, and how the Fed’s actions are impacting our markets.

The post Sept 21, 2022 Fed Rate Hike appeared first on Christie Mitsumura Blue Seas Team.

For mortgage rates

There’s a common misconception that the Fed raising rates with a Fed rate hike leads to higher mortgage rates, but it’s important to understand what drives mortgage rates.  The price of mortgage backed securities (MBS) are the only thing that directly move mortgage rates, and MBS often see an improvement (improving rates, aka bringing them down) when there’s a Fed rate hike.  Today was no exception.  The reason for this is that the Fed rate hike is a measure implemented to slow down the economy and to fight inflation.  High inflation is a major cause of increasing mortgage rates (and is one of a few reasons we’ve seen mortgage rates go up so much in 2022!), so the Fed’s actions should theoretically reduce inflation, helping mortgage bonds, and thus lowering mortgage rates.

In fact, since the Fed’s last rate hike in June, mortgage bonds have improved substantially, and mortgage rates have come down from their highs.

For other debts

Some debts are directly impacted by a Fed rate hike.  Home equity lines of credit (HELOCs), for example, are often tied to the prime rate, which moves in step with the Fed funds rate.  Because the prime rate goes up and down with each Fed rate hike, HELOC rates will move as well, and for that reason, rates on HELOCs will immediately go higher on the Fed announcement.  Other debts tied to the prime rate will do the same.  For this reason, consumers can expect their credit card payments to increase as most credit cards have their interest rates tied to prime.

For the broader economy

Fed rate hikes historically precede periods of recession.  The Fed’s action reduces inflation, but it also makes borrowing costs of financial institutions more expensive.  This tends to slow down borrowing and spending, which in turn slows down the economy.  In today’s marketplace the Fed has made it clear that fighting inflation is their #1 objecting, and the broader economy, while of concern, is being focused on less than reigning in stubborn, persistent inflation that was once thought to be “transitory”.

The Fed rate hike has many implications, but it’s very important to know that the Fed is NOT raising mortgage rates, and in fact, their actions typically lead to lower rates.  That’s important to understand today, because with mortgage rates spiking in early 2022, we’ve seen an increase in inventory on the market as many buyers have been forced to the sidelines.  Interest rates coming down could present a great opportunity for many buyers who now have less competition in the market and more inventory to choose from.  The Fed has also made it clear that their expectation is for more rate hikes throughout 2022 and beyond, so if the markets behave as expected, we may see some great opportunities with lower rates in the mortgage space in the months ahead.

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