The Board of Governors of the Federal Reserve Bank (The Fed for short) met today (3/16/2022) to discuss monetary policy.  At the end of the meeting, they announced a Fed rate hike.  The Fed has a dual mission – to keep the economy growing, and to keep inflation low.  These two goals conflict with each other, because a rapidly growing economy is likely to spur inflation, so the Fed has a delicate balancing act to perform.

In 2020, fearing a COVID-fueled recession, the Fed tried to goose the economy with several measures.

They lowered short-term interest rates to make it cheaper for consumers to buy goods and businesses to borrow money.

They began purchasing U.S. Treasury bonds (to the tune of tens of billions of dollars per month) to drive down longer-term interest rates.

They also began buying mortgage-backed securities to flood the mortgage industry with cash, so the market would drive mortgage rates down.

Finally, they handed out money to businesses and consumers in the form of stimulus checks. You may have received one yourself.

Reversing Course with a Fed Rate Hike

By flooding the market with cash, they encouraged consumers to spend, thus goosing the economy.  However, if the economy grows too rapidly, inflation is hard to control.  Arguably, they overshot their goal and now inflation might be out of control.  In response, today they announced a Fed rate hike of 0.25% to make borrowing via credit card or credit line more expensive, and they have announced plans to taper their purchases of bonds and mortgage-backed securities.

By raising short-term interest rates, they hope to slow down the economy and thus slow down inflation.

Dig Deeper: What is the target rate?

What does a Fed Rate Hike Affect?

After a Fed rate hike major banks tend to raise the Prime Rate – the interest rate they offer to their best corporate customers.  While this isn’t mandatory, it pretty much always happens.  The Prime Rate is used to set interest rates for credit cards and lines of credit (including home equity lines.)  So, if you owe money on credit cards or a home equity line, this will impact you.

Did the Fed Raise Mortgage Rates?

The Fed doesn’t control mortgage rates, so the short answer is “no.”  In fact, this may have a beneficial effect on mortgage rates.  Interest rates on long-term borrowing (like mortgages) is driven primarily by the expectation of future inflation.

Dig Deeper: Inflation and Interest Rates

I know that you’ll be getting mailers and seeing advertisements from mortgage lenders telling you that you must hurry to refinance because “The Fed is raising interest rates!”  I also can’t tell you that today’s Fed rate hike will make interest rates go down, because the many factors pushing interest rates around today are out of the ordinary.  (To understate the case.)

Dig Deeper: Wholesale versus Retail Interest Rates and Projection

However, the tapering of purchasing mortgage-backed securities by the Fed means that there will be less competition for the securities.  This would typically mean investor yields will rise, increasing the “retail” mortgage rates that you are offered.  On the other hand, demand for mortgages has declined dramatically, so less demand from borrowers means that increasing competition amongst investors buying the loans and lenders making the loans should mitigate some of that effect.

How the Fed Interest Rate Increase Affects Mortgages

You can see by now that the Fed doesn’t, and didn’t, increase mortgage rates as a result of increasing the target rate.  Mortgage rates have risen dramatically in the past few weeks, partly due to inflation expectations, but most likely even more so due to international affairs that have investors wondering which way to go.

Moving forward, in the short term I don’t think anyone has a good idea of where rates are likely to go.  They are likely to remain unstable; lenders don’t like that so the rates offered to you are not likely to get better soon.  In the long run, the Fed’s tapering of MBS purchases will put upward pressure on interest rates.  Unless institutional investors jump in to fill the gap (that’s not likely to happen) it’s almost certain that mortgage interest rates will rise over slowly the course of the year.

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Casey Fleming, Mortgage Advisor and Author of The Loan Guide: How to Get the Best Possible Mortgage

About Casey Fleming: Casey Fleming is a veteran mortgage advisor (NMLS 344375) and Author of The Loan Guide: How to Get the Best Possible Mortgage.  Casey advises clients  throughout California, and is based in the heart of Silicon Valley.  He writes articles regularly for several online publications, is a subject-matter expert for two prominent finance-related sites, and is regularly quoted in articles for many other publications.

This article represents the opinions of Casey Fleming, and not necessarily those of anyone else.  This analysis was prepared with the best information available at the time it was written.  Neither Casey Fleming, nor LoanGuide.com, have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source.  No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor LoanGuide.com. are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.

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