What upcoming Fed rate hikes mean for your mortgage rate

Higher mortgage rates could be coming quickly

The Federal Reserve made it clear in its latest meeting that it doesn’t view inflation as transitory. And it may adjust 2022 policies to reflect that.

Many experts now speculate the Fed will raise interest rates sooner than initially planned; maybe as early as March. And it could hike rates four times (up from three) over the course of the year.

That means significant mortgage rate growth could take off in the next few months. It also means if you’re betting on interest rates to decline before you buy a home or you pushed off refinancing, the interest rate environment might never be lower than it is now.

Find your lowest rate before they rise. Start here (Jan 10th, 2022)

The Fed’s impact on interest rates

To be clear upfront, the Federal Reserve doesn’t set mortgage rates. However, rates correlate with its actions and policy changes. 

The Fed announced after its Federal Open Market Committee (FOMC) Dec. 15 meeting that it will wind down the buying of mortgage-backed securities (MBS), a move it initiated to help stimulate the economy during the pandemic. 

That tapering will drive interest rates higher. 

The fed funds rate and mortgage rates

Additionally, minutes from the Dec. Fed meeting (released on Jan. 5) stated “it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated” due to the positive labor market and overall economy, plus elevated inflation.

The federal funds rate is what banks pay to borrow money from each other overnight. When the Fed increases that rate, it signals higher inflation and economic expansion. 

While the relationship isn’t direct, mortgage rates almost always move in line with the federal funds rate. The graph below shows the relationship. 

Source: Federal Reserve Bank of St. Louis

According to the meeting minutes, the FOMC members projected the MBS purchasing to wrap up in March and the federal funds rate to increase in June.

What borrowers should do

If mortgage rates grow alongside the Fed’s MBS tapering and increasing federal funds rate as expected, house shoppers and homeowners looking to refinance should act fast. 

Of course, nobody knows with 100% certainty where interest rates will go. But given the current market indicators, forecasts predict rates will rise to around 4% by the end of 2022. 

While a 4% mortgage rate is still low from a historical perspective, locking in a rate before they rise could save you thousands of dollars over the life of your home loan. 

Verify your new rate (Jan 10th, 2022)