Experts React to the Fed’s 0.25% Rate Hike: What It Means for Homebuyers and Homeowners

Experts React to the Fed's 0.25% Rate Hike. Here’s What It Means for Homebuyers and Homeowners Tom Williams/CQ-Roll Call, Inc via Getty Images
Federal Reserve Chairman Jerome Powell testifies during the Senate Banking Committee hearing on March 3, 2022 in Washington, D.C.
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The Federal Reserve announced this week the first increase in its benchmark short-term interest rate since the pandemic, a move that could lead to higher mortgage rates this year, although experts say the two aren’t directly connected.

For the most part, experts say markets expected the Fed’s announcement of a quarter-point increase. “There weren’t any big surprises,” says Tendayi Kapfidze, chief economist for U.S. Bank.

There are some connections between the Federal Reserve’s short-term rate, known as the federal funds rate, and the interest rates homeowners pay for their mortgages, but they aren’t as tightly connected as the federal funds rate is for, say, credit card APRs, experts say. “They don’t follow exactly what the Fed rates do, but the Fed rates do influence mortgage rates,” says David Yi, president of Providence Mortgage. 

The Fed’s increase likely won’t mean much for mortgage rates in the short term because it was in line with the market’s expectations, says Paul Thomas, vice president of capital markets for mortgages at Zillow Group. In the long run, expectations that the Fed will continue to raise rates into 2023 could put some upward pressure on mortgage rates. “Some of that future increase is built in already to mortgage rates, but the ongoing rate hikes will increase mortgage rates,” he says.

What the Federal Reserve is Doing

The Fed on Wednesday raised the target range for the federal funds rate to 0.25-0.5%, a quarter-point hike from the near-zero level it has been at since the pandemic started. Fed officials also noted they expect about six more rate increases this year, although Chairman Jerome Powell said those decisions will be made at subsequent meetings. “We will need to be nimble in responding to incoming data and the evolving outlook, and we will strive to avoid adding uncertainty to what is already an uncertain and challenging moment,” Powell said.

The Federal Open Market Committee (FOMC), a panel of Fed officials who set the target for the federal funds rate, said in a statement that the labor market shows strength, including strong job gains and low unemployment, while inflation is “elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”

Russia’s invasion of Ukraine has raised more questions about the economic future, the FOMC said. “The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”

The goal of raising the federal funds rate is to fight inflation by reducing demand, Yi says. “The Fed’s jumping in to try to make purchasing less attractive.” The rate of inflation has been very high the past few months, with the Bureau of Labor Statistics reporting a 7.9% year-over-year increase in the consumer price index in February. That’s a rate not seen since 1982.

“Inflation is a natural thing,” Yi says. “It happens every year. But just the rate and the pace we’ve seen is not what we’ve seen for a long time.”

The Fed faces a difficult task because much of the inflation isn’t driven by factors it can control by raising rates, Kapfidze says. Inflation is largely so high right now because of supply-side issues. That includes supply chain disruptions because of COVID, lockdowns in areas of China that produce consumer goods as they face the Omicron variant. Others include the effects on the labor market of the pandemic and the ripple effects of the war in Ukraine. “The Fed can’t do much about the supply side,” Kapfidze says. “Where the Fed policy works is on the demand side.”

Raising rates comes as the Fed tries to balance the two sides of its mandate: keeping prices stable, meaning inflation around 2%, while also supporting a strong labor market, meaning low unemployment. With the unemployment rate at 3.8%, beating Fed officials’ expectations on the job recovery from the pandemic, Powell said this week he expects the labor market can handle rate increases to target inflation. “We do believe the economy is very strong and well-positioned to withstand tighter monetary policy,” he said.

Pro Tip

The Fed’s rate increases likely mean higher mortgage rates in the future, so shop around with different lenders to get the best deal. Rates can vary significantly between lenders.

How the Fed Affects Mortgage Rates

The federal funds rate and mortgage interest rates are driven by similar factors, experts say. “We’ve already seen mortgage rates run up ahead of the Fed meeting,” Kapfidze says. “The Fed funds rate isn’t directly connected to mortgage rates, although both rates react to the same information.”

The federal funds rate is a short-term rate, meaning it tracks more directly with shorter-term debt like credit cards, while mortgages tend to track longer-term debt like the 10-year U.S. Treasury note, Thomas says. 

The expectation that the Fed might potentially hike its rate seven times this year could contribute to more upward movement in mortgage rates, which had been rising in recent weeks in part to anticipate the Fed’s change, Kapfidze says. 

If the Fed’s changes and other factors succeed in bringing inflation down more quickly or more steeply than currently projected, that could lead to declines in mortgage rates or at least more stability, Yi says. With the current inflation rate, that might be a heavy lift. “We are in a rising rate environment,” he says. “We hope it comes down eventually but many economic analysts are looking at inflation that will be longer-term, not just a one or two month thing.”

How the Fed Changes Affect Consumers

The Fed’s move is one more factor driving highly volatile mortgage interest rate changes, and it’s hard to predict exactly where rates will end up. Experts do expect them to keep going up.

For existing homeowners looking to refinance, the current surge in mortgage rates means there are fewer people who could save money by getting a new loan with a lower rate, just because there are fewer people with higher rates than those on the market now. That doesn’t mean you aren’t among those who can save, especially if your existing rate is above 5% and you can shop around and find a good rate. 

For homebuyers, interest rates are just one piece of the financial puzzle. You’ve also got to deal with home prices, your financial situation and countless other pieces. Kapfidze says buying a home is less about your money and more about your life. “I usually say to folks that interest rates are very difficult to project and figure out where they’re going to go,” he says. “If you are thinking about buying a house, make a lifestyle decision.”

When you decide to buy a house, make sure to shop for a mortgage and try a few different lenders, Kapfidze says. “The range of mortgage rates on any given day can be as wide as a percentage point,” he says. “Even with generally rising rates you still get a range of different rates depending on different characteristics.” Also, don’t read about rates going up and expect that you can’t find a good deal. Go see what you can actually get. “Don’t negotiate against yourself,” he says.

Perhaps a bigger concern facing homebuyers than mortgage rates is the high and rising level of home prices. Thomas says that is a result of mismatched supply and demand in the home market. “Buyers have more buying power with low mortgage rates,” he says. “There was a lot more demand than supply.” Home builders are responding to that demand, but supplies and labor have been limited, he says. Rising mortgage rates might slow the growth of home prices.

As mortgage rates rise, Thomas says it’s important to have some perspective. Rates below 5% were rare before 2011, and rates between 4% and 5% were common before the pandemic, he says. “As a homebuyer, it’s important to keep in mind that while mortgage rates have gone up this year, they’re still at historic lows.”