A Fed Rate Hike is Coming in March That Doesn't Mean Mortgage Rates Have to Rise

The Federal Reserve on Wednesday decided not to raise interest rates this month, but confirmed that its asset purchasing program would conclude in March.

Additionally, it decided that it “will soon be appropriate to raise the target range for the federal funds rate.” That likely means a March rate hike.

For homebuyers, recent Fed actions may forever block the path back to sub-3% mortgage rates. 

The silver lining to eroding affordability: softer demand and slower price growth that’s become a hallmark of the pandemic housing market.

Rising rates may be a blessing in disguise.

Should homebuyers panic-lock their loans, like, now?

While it may seem like the sky is falling, homebuyers do not necessarily need to find a home and lock in a rate before they’re ready.

Fed rate increases are already “baked into” today’s mortgage rates. It’s not as if homebuying rates will suddenly jump again in March, when the Fed will likely raise its benchmark rate.

Mortgage rates are like the stock market: they are forward-looking. If the market sees an oncoming recession, stocks fall way before the recession is here. Likewise, mortgage rates rise before the Fed actually moves – especially since the Fed telegraphs its intentions long before acting.

This fact should relieve at least some of homebuyers’ stress. Rates will still be low when they are ready to home-shop; just not quite as low as they were. And rates could even come down in coming months if the market decides it overreacted to Fed talk. It’s actually a common pattern, all the more reason to lower your stress level as a homebuyer.

How Fed policy affects mortgage rates

The Federal Reserve doesn’t directly set mortgage rates. However, its policies – the market’s reaction to those policies – dictate whether mortgage rates go up or down.

Beginning in March 2020, the Fed has been using two tools to keep mortgage rates artificially low to encourage spending and stimulate the economy.

1. Buying $120 billion per month of Treasury bonds and mortgage-backed securities, known as asset purchasing or “easy money policy”
2. Keeping its own interest rates – known as federal funds rates – as low as possible

With the economy recovering in 2021, the Fed began its exit strategy from stimulus spending. It first hinted at gradually reducing its monthly asset purchases, known as “tapering,” in September which caused rates to gradually rise. In November, it implemented a taper plan that would end its asset purchasing by the middle of 2022 and signaled that it would not raise federal funds rates until asset purchasing concluded.

In December, with inflation running hotter than expected, the Fed accelerated the taper plan so it would end in March instead of June – the track it confirmed today. The fast track taper cleared the path for the Central Bank to begin hiking federal interest three months sooner and changed the calculus for how many rate hikes the Fed could squeeze into 2022.

Coupled with growing inflation concerns, market speculation over when and how many times the Fed would hike federal funds rates caused mortgage rates to rise rapidly in the first weeks of 2022.

Today the FOMC confirmed the taper would end in March and coincide with the first rate hike.

“I would say that the committee is of a mind to raise the federal funds rate at the March meeting, assuming that the conditions are appropriate for doing so,” said Fed chair Jerome Powell at a press conference.

Powell did give a firm answer on the frequency or amount of rate hikes to come in 2022, although he confirmed the FOMC’s goal is to get inflation down from 7% to 2%.

The bottom line for homebuyers and homeowners considering refinancing is that the conditions that allowed for sub-3% mortgage rates in 2020 and 2021 are no longer in place.

Mortgage rate projections are not a reflection of Fairway’s opinion or guarantee of interest rates in the current or upcoming market.