Maybe the Fed Hike Was Exactly What the Doctor Ordered…

On Wednesday, the Federal Reserve did something that, on the surface, sounds like terrible news for anyone thinking about buying a home: it raised interest rates by another quarter-point.

With mortgage rates already above 7% and gasoline around Metro Atlanta pushing above $4.00 per gallon, another rate increase hardly sounds like something worth celebrating.

But when it comes to mortgage rates, things are rarely that simple. The Fed raised its benchmark federal funds rate by 25 basis points, bringing the target range to 3.75%–4.00%. More importantly, the Fed made its reasoning clear: inflation remains too high, and policymakers intend to bring it under control and ironically, that may ultimately be good news for mortgage rates.

Here’s why…The Federal Reserve does not directly set 30-year mortgage rates. The Fed controls a very short-term interest rate…the federal funds rate. Mortgage rates, on the other hand, are much more closely tied to the bond market and longer-term interest-rate expectations. That means the bigger issue for mortgage rates isn’t simply whether the Fed raises or lowers rates. It’s whether investors believe the Fed is serious about controlling inflation…and right now, inflation has an additional problem: energy prices. Higher oil and gasoline prices can work their way through virtually every corner of the economy. It costs more to drive to work, deliver groceries, operate construction equipment, ship products and run businesses. Those additional costs eventually find their way into the prices consumers pay.

For the bond market, persistent inflation is kryptonite. So while Wednesday’s Fed hike may feel like bitter medicine, it could ultimately help if investors become convinced that inflation will be brought under control. Mortgage News Daily has also pointed out that a Fed hike does not automatically translate into higher mortgage rates because the two operate at different points on the interest-rate spectrum. The average top-tier 30-year fixed mortgage finished Wednesday around 7.24%, according to Mortgage News Daily. Nobody wants 7% mortgage rates. Nobody wants $4 gasoline. And certainly, nobody gets excited about a Fed rate hike.

But sometimes the medicine that tastes the worst is the medicine you need.
If Wednesday’s move convinces Wall Street that the Fed is truly committed to defeating inflation, this rate hike might just be what the doctor ordered for mortgage rates.