The Federal Reserve attacks inflation with an announcement of a .75% or 75 basis points rate hike. This is the largest rate increase since 1994 and said ongoing increases would be forthcoming to combat inflation that is running at a 40-year high. They stated that future rate hikes will be appropriate but Chairman Jerome Powell was quoted saying, “investors should necessarily not expect 0.75-percentage-point hikes to be common going forward.” The feds raised the federal funds rate by 25 basis points in March 2022 and 50 basis point in May 2022 for reference.
The reasoning behind this is to help us all with the sting of high inflation and protect the rate of employment. The Federal Reserve stated their goal is to achieve maximum employment and inflation at the rate of 2% over the longer run. To achieve these goals, the Committee decided to raise the target range for the federal funds rate to 1.5% to 1.75% and said ongoing increases in the target range will be appropriate. As well, they will continue to reduce holdings of Treasury securities, agency debt, and agency mortgage-backed securities that were announced in May of 2022.
You can count on Angel Oak to deliver market updates and break it down to understand how that affects our customers. We have outlined important information based on commonly asked questions we have received:
Important To Know:
Mortgage rates for home loans are not the same as the federal funds rate. The federal funds rate is set by the central bank and is the interest rate at which banks borrow and lend to one another. It is not the rate that consumers pay. However, it still affects the borrowing and saving rates that consumers see each day. The bottom line is that consumers will have to pay more to borrow.
Mortgage rates do not fluctuate with changes to the federal funds rate. Instead, mortgage rates follow the path of the yield on 10-year Treasury bonds. Treasury bonds are influenced by many factors, but the most relevant to today is the reaction to inflation. Inflation has and will cause more influence on raising mortgage rates than the federal funds rate.
Mortgage interest rates are out of control. Rates are higher – but they are still not out of control. Regardless of the increase, the market is still in a historically low rate environment. The only mortgage rates that do change with the federal funds rate are home equity lines of credit (HELOC) and adjustable-rate mortgages (ARMs). Anyone with an adjustable-rate mortgage might want to consider a refinance into a fixed rate.
The Federal Reserve’s rate increase is a negative thing for consumers. The Federal Reserve is reacting to the current high level of inflation in order to bring it down. The central bank has always had a goal to control inflation. They are now using their main tool, interest rates, to battle inflation. Rising interest rates will help to slow the economy which will, in turn, get inflation under control. According to Chairman Jerome Powell, the Federal Reserve is approaching the rise in rates cautiously in order better control inflation, but not weaken the economy to reverse any progress made so far since the pandemic.
Should you still buy a home?
We stand by our advice that if you are financially ready and with a good to excellent credit score then today’s market is still a good time to buy. There are loan options available with flexible down payment requirements and interest-only mortgages to help with lower monthly payments. The best way to understand how decisions made by the Federal Reserve affects the mortgage industry and you is to call a lender. We are here to have a conversation about whether you are ready to buy a home now or in the future. We are all in the same market – let’s work together!