When keeping an eye on the housing market news, you might come across decisions made by the Federal Reserve (the Fed) and wonder how they affect your plans to buy a home. Here is a breakdown of what you need to know. The Fed is actively working to reduce inflation. Despite seeing 12 consecutive months of inflation cooling down, the latest data shows it remains higher than the Fed's target of 2%. While you may have hoped that the Fed would halt their rate hikes due to progress in curbing inflation, they are cautious about stopping too soon and risking a resurgence of inflation. Consequently, the Fed recently decided to raise the Federal Funds Rate again. Jerome Powell, the Chairman of the Fed, emphasized their commitment to bring inflation back to the 2 percent target and to anchor longer-term inflation expectations.
Greg McBride, Senior VP, and Chief Financial Analyst at Bankrate, sheds light on how high inflation and a robust economy influenced the Fed's decision: "Inflation remains stubbornly high. The economy has been remarkably resilient, the labor market is still robust, but that may be contributing to the stubbornly high inflation. So, Fed has to pump the brakes a bit more."
Although a Federal Funds Rate hike does not directly determine mortgage rates, it does have an impact. As per a recent article from Fortune: "The federal funds rate is an interest rate that banks charge other banks when they lend one another money . . . When inflation is running high, the Fed will increase rates to increase the cost of borrowing and slow down the economy. When it is too low, they'll lower rates to stimulate the economy and get things moving again."
How Does It Affect You?
In simple terms, when inflation is high, mortgage rates also tend to be high. However, if the Fed successfully brings down inflation, it could lead to lower mortgage rates, making it more affordable for you to buy a home.
Based on historical trends, McBride predicts the future of mortgage rates: "With the backdrop of easing inflation pressures, we should see more consistent declines in mortgage rates as the year progresses, particularly if the economy and labor market slow noticeably."
The trajectory of mortgage rates heavily depends on inflation. If inflation cools down, mortgage rates are likely to follow suit and decrease. For reliable advice on housing market changes and their implications for you, it is essential to seek guidance from an experienced Realtor like Scott Smolen and your mortgage lender!
