The Federal Reserve made a significant move on Wednesday, raising its benchmark lending rate by a quarter point, aiming to curb the surging inflation and cool down the economy. This latest rate hike takes the interest rates to their highest level in 22 years, signaling the Fed's commitment to combat above-target inflation.
The Fed's actions, while not directly setting mortgage interest rates, have a significant impact on them. Mortgage rates typically follow the yield on 10-year US Treasuries, which are influenced by a combination of anticipation about the Fed's moves, the actual actions taken, and investors' reactions. Consequently, when Treasury yields rise, mortgage rates tend to increase, and when yields drop, mortgage rates usually follow suit.
Federal Reserve Board Chairman Jerome Powell, speaking during a news conference, emphasized the need to tackle above-target inflation. He outlined the possibility of further rate increases ahead, indicating that the central bank will continue to assess economic data and its implications for monetary policy.
Hannah Jones, an economic data analyst at Realtor.com, commented on the recent inflation and employment data. While there were signs of slowing price growth and more moderate hiring, robust consumer spending still kept inflation above the 2% target. The Fed's statement affirmed its determination to bring down inflation, recognizing that the full impact of the rate hikes and credit tightening is yet to be fully realized.
As the Fed hikes interest rates, it hints at another potential increase later this year. Powell emphasized a data-informed approach to future rate hikes, acknowledging that restoring price stability might require a period of below-trend growth and some softening of labor market conditions.
However, despite the efforts to tackle inflation, home prices remain elevated. While the median list price for a home saw a decline compared to the previous year, the cost of financing a median-priced US home, assuming a 20% down payment, rose significantly by 12.4% during the same period.
Jones pointed out that many homebuyers have adjusted to the higher mortgage rates, which have remained in the 6% to 7% range for almost a year. Nevertheless, seller activity remains sluggish as homeowners hesitate to list their homes for sale in the current higher mortgage rate environment.
Over the past 54 weeks, fewer homeowners have listed their homes for sale compared to the previous year, resulting in a limited number of homes on the market. This scarcity has led to high levels of competition among eager buyers, creating a more competitive environment and maintaining relatively stable home prices nationwide.
In conclusion, the Federal Reserve's decision to raise interest rates reflects its commitment to combatting above-target inflation and controlling the economy's heating. These rate hikes indirectly influence mortgage rates, impacting the housing market, and creating a more competitive environment for homebuyers. As the economic landscape evolves, potential homebuyers and homeowners need to stay informed and work closely with real estate professionals to make well-informed decisions in this changing interest rate environment.