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Understanding The Market: Federal Fund Rates and Interest Rates


Understanding The Market: Federal Fund Rates and Interest Rates

This past week, the Federal Reserve hiked the Fed Fund Rate by .50%, the largest rate increase in 22 years. How does the Fed move to bring down inflation? Raise rates and tighten monetary conditions. And this started on Wednesday when the Fed raised the Fed Funds rate by .50%. In a separate measure, the Fed will also begin shrinking its enormous $9T balance sheet of Treasuries and mortgage-backed securities (MBS).

It is important to remember that this hike in Fed Funds Rate has no direct effect on home loan rates. Oddly enough, the measures the Fed is taking to lower inflation help preserve the value of long-term bonds like MBS. If the Fed is successful in bringing down inflation, it will help long-term bond prices improve and long-term rates remain relatively stable. This means that mortgage interest rates, which are separate from the Fed’s rates but typically follow the same trajectory, will likely rise even higher.

If inflation calms, the Fed may not raise rates as much and mortgage rates could stabilize or even dip a bit. However, if inflation continues its bruising climb, the Fed may increase its rates by larger increments, which could lead to yet higher mortgage rates.

The Fed hopes that raising its interest rates with the largest increase in more than 20 years will cool inflation. When rates are higher, it makes it more expensive to borrow money or make purchases using credit. So if fewer people are buying products, it takes some of the pressure off, allows suppliers a chance to catch up, and gives prices some room to stabilize.

The lift to the Fed Funds Rate will immediately impact all short-term loans, like auto loans, credit card debt, and home equity lines of credit. Increasing these rates is expected to slow consumer demand, which in effect will slow price increases. The Fed hopes it can continue to raise rates more and slow demand without pushing the economy into a recession.

How much more will the Fed hike rates? The Fed Chair signaled they are likely to raise rates by another .50% in both June and July. Of course, making these moves will depend on the incoming data. This means we should continue to expect high-interest rate volatility around key economic reports like inflation, GDP, and the labor market.

Despite the Fed Chair saying the Fed is not considering a .75% rate hike, the markets finished the week assigning a very high probability the Fed will hike by .75% in June.

Bottom line: Home loan rates are at an important juncture. While MBS attempt to stabilize, there is a real threat they can go another leg higher and fast. If you are considering a purchase transaction, now is the time to lock. 

If you have any questions about current market conditions or the impact rising rates will have on your home buying process, please reach out! We’d love to talk through it with you.

This information is being shared from MMG Weekley via First Horizon Bank