The Federal Reserve on Wednesday approved a much-anticipated interest rate hike that takes benchmark borrowing costs to their highest level in more than 22 years.
In a move that financial markets had completely priced in, the central bank’s Federal Open Market Committee raised its funds rate by a quarter percentage point to a target range of 5.25%-5.5%. The midpoint of that target range would be the highest level for the benchmark rate since early 2001.
Chairman Jerome Powell said inflation has moderated somewhat since the middle of last year, but hitting the Fed’s 2% target “has a long way to go.” Still, he seemed to leave room to potentially hold rates steady at the Fed’s next meeting in September.
“I would say it’s certainly possible that we will raise funds again at the September meeting if the data warranted,” said Powell. “And I would also say it’s possible that we would choose to hold steady and we’re going to be making careful assessments, as I said, meeting by meeting.”
Powell said the FOMC will be assessing “the totality of the incoming data” as well as the implications for economic activity and inflation.
Impact on home buyers
Mortgage rates had already crept upward ahead of the Fed’s 25-basis-point increase announced at the July meeting. Rates on 30-year fixed-rate loans have hovered close to 7% throughout the summer.
The Fed has indicated that it will likely raise rates at least another 25 basis points, but that could change depending on economic data. If investors think the Federal Reserve is backing off from hikes, that would relieve the upward pressure on mortgage rates. Barring any changes in forecasts, though, mortgage rates could rise if markets anticipate that the next hike will come at the Fed’s September meeting.
The Fed exerts influence on mortgage rates, but indirectly. Financial markets set mortgage rates, which are influenced by the inflation outlook — and markets are increasingly convinced that inflation is headed downhill.
This year’s home buyers confront an obstacle: Not enough homes are for sale to meet demand. The shortage is blamed partially on “rate lock-in,” in which homeowners with low mortgage rates keep their homes off the market because they don’t want to pay higher interest rates on their replacement homes.
Given how much interest rates can change the math of your homebuying budget, make sure to keep your mortgage preapproval up to date. You don’t want to make an offer on a home only to find out that it’s out of your price range at the current interest rate. You might also consider buying a mortgage rate lock to ensure your rate doesn’t increase before your home purchase closes.
