Mortgage Rates Dip as Fed Tempers Hikes

Federal Funds Rate Changes, 2020-Present

The decision may reflect the same sentiment as just a year ago, but the motivations (and future expectations) couldn’t be more different. Last March, the Fed began a course of rate hikes to combat not-very-transitory inflation, while today it’s raising rates by a smaller margin as consumer prices seem to be normalizing.

Still, Powell said at a news conference that it’s “premature” to declare victory against inflation. If Fed policymakers raise the rate by too little, inflation could return with a vengeance. But if they raise it too high, they risk sending the U.S. economy into a recession

The Fed’s latest decision to move interest rates higher by 0.25 percentage point seems like the logical thing to do. Consumer price increases are slowing, job growth is strong, and Powell is agonizingly close to sealing his victory of a soft landing – that is, bringing down inflation without sending the U.S. economy into a recession. By all accounts, economists have good reason to enjoy a snack-size bite of optimism.

Years of self-reflection have led me to realize that I can be pessimistic by nature, but part of me has to wonder if that cynical voice in my head is worth a listen, and if more inflation is waiting silently around the corner, ready to jump at the first sign of weakness.

One thing remains true: Investors react (almost too quickly) to Fed policy decisions, and investors play a big part in where mortgage rates are headed next. When the central bank takes even the most cautiously optimistic approach to monetary policy, markets tend to read a more bullish translation. And while investors act partly on real-time policy decisions, they often price in their anticipation of future economic conditions instead.

“As inflation calms further from rising apartment vacancies in upcoming months, the Fed will adjust to a no-rate increase by the middle of the year and even a rate cut by December,” says Lawrence Yun, chief economist at the National Association of Realtors. “That is good news for mortgage rates, which will possibly fall to 5.5% by the year-end.”

Mortgage rates are already headed downward even though the Fed hasn’t yet reached its terminal rate, meaning that investors are still betting on the chance that the Fed will continue to slow – or even reverse – the course of rate hikes sooner than expected if the economy falters. Although lower borrowing costs would be a boon for homebuyers who have been left on the sidelines for much of 2022, the risk of a recession brings with it an even bleaker economic outlook, with widespread job loss and weak household balance sheets.

With every dip in mortgage rates comes a flood of millennial and Gen Z consumers who are ready to jump on the opportunity to buy their first home, but they may not be so eager if they’re also facing recession-induced layoffs.