Worried about mortgage interest rates? Here's what the Fed's rate hikes mean
Worried about mortgage interest rates? Here's what the Fed's rate hikes mean
Abstract
Economists say there is a link between the Fed's moves and mortgage interest rates, but it's misleading to focus on the Fed's hikes in short-term interest rates. The average interest rate for a 30-year fixed mortgage was lower Wednesday than it was a week ago, even though the Fed was poised to hike short-term rates for the fourth time in a little more than four months. If you look at the interest rate for 10-year Treasury notes - which tends to move in the same direction as mortgage interest - you'll see it rose slowly as inflation took off late in 2021 and early 2022, then jumped as the Fed started raising the federal funds rate in March. The interest rate on 10-year Treasuries, like the average rate for 30-year mortgages, peaked in mid-June and has eased back down, despite the Fed's stated plan to raise the federal funds rate several more times this year. Robert Heck, vice president of mortgage for online mortgage broker Morty, said the Fed has been, "By far, the biggest buyer of mortgage-backed securities over the past 15 years." Its decision to pull back from that market will greatly increase the supply of those securities, driving prices down and interest rates up, Heck said. If the Fed were to start actively selling its mortgage-backed securities, instead of just letting its portfolio shrink naturally, "It likely would have a fairly big negative impact on rates," Heck said - meaning mortgage interest rates would be driven up. If the Fed manages to take the steam out of inflation, that should lower mortgage interest rates, Heck said.