Mortgage rates set for growth
The Federal Reserve will move forward with tightening its fiscal policies in 2022, just not as aggressively as originally planned.
The central bank announced in January that it would raise the fed funds rate multiple times this year to combat historically high inflation. Since then, war broke out when Russia invaded Ukraine, sending gas prices skyward and blanketing financial markets in uncertainty.
The Fed’s actions and the war in Ukraine have pulled rates in opposite directions. But despite this, the central bank raised the target fed funds rate at its March meeting and additional hikes are expected to follow each of the six remaining FOMC meetings in 2022.
Any borrowers looking to refinance or buy a home should act quickly before interest rates likely increase in the months ahead.
The Fed’s impact and the latest FOMC meeting
No, the Federal Reserve doesn’t actually set mortgage interest rates. However, its policies and actions closely correlate with mortgage rate movement.
After its FOMC March 16 meeting, the Fed announced it will raise the target range of its federal funds rate for the first time since 2018 and anticipates further increases will be appropriate. It will also reduce its holdings of Treasury securities, mortgage–backed securities (MBS) and agency debt.
“The Fed’s new policies indicate economic growth, are a means to offset inflation, and mortgage rates almost always grow in response.”
“Indicators of economic activity and employment have continued to strengthen” and “inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the central bank said in a press release, justifying its new policies.
While the Russian–Ukraine war creates uncertainty and hardship, “the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity,” the statement continued.
The FOMC did add the caveat that it may adjust its policies based on how “financial and international developments” continue to unfold.
This aligned with the guidance from the FOMC’s January meeting and recent market expectations heading into the March meeting. The latest guidance from the committee provides clarity to where interest rates should go during an unsettling time.
These policies indicate economic growth, are a means to offset high inflation, and mortgage rates almost always grow directly with them.
“This is what the Fed needs to do to bring inflation under control,” said Mortgage Bankers Association SVP and Chief Economist Mike Fratantoni. “Hopefully, the Fed’s actions and explanations can help to reduce the policy uncertainty, which would then diminish some of the current volatility.”
What this means for you, the borrower
With the exception of a few recent dips following war breaking out in Ukraine, interest rates grew significantly to start 2022.
The Fed’s latest actions should put upward pressure on mortgage rates throughout the rest of the year. Fratantoni said the Mortgage Bankers Association now predicts the average 30–year fixed rate mortgage to settle at 4.5% by the end of 2022. Comparatively, the MBA projected a 4.3% average in its February forecast.
Rate predictions can look amiss in retrospect, but all current indications point to a growing rate environment moving forward. Of course, while the average interest rate should experience a general uptrend, it likely won’t move in a straight line, having ups and downs from week–to–week.
Bottom line: the most likely scenario is interest rates may never be lower than they are right now. If you are in the market to get a home loan or refinance your mortgage, act as soon as you can.
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