The Federal Reserve just raised interest rates for the 10th time in 14 months.
Mortgage rates are already about 3.8 percentage points higher than they were at the beginning of 2021, but today’s Fed action probably means they’ll go up even more.
The Fed doesn’t directly set mortgage rates, but the Fed’s policy decisions are among the most important drivers that determine mortgage rates in the market. For details on what moves mortgage rates, check out this article: “The Effect of Fed Policy Decisions on Mortgage Rates: What Homeowners Need to Know.”
Three basic factors are conspiring to keep mortgage rates going up:
- Inflation is still too high. Prices rose 5.0 percent over the last year, according to April’s report on the Consumer Price Index. Even worse, consumers expect high inflation to continue, according to surveys. Both high inflation and high expectations push mortgage rates up.
- The economy is still too strong. Continuing growth in employment, income, and consumption will keep upward pressure on prices, so the Fed needs to see some easing in job markets and overall demand. The Fed will have to keep pushing rates up to prevent the economy from overheating.
- The housing market is still too strong. House prices nationwide are about 40 percent higher than they were three years ago, and the median price for existing single-family houses is now a whopping $380,000. Competition among house buyers puts more upward pressure on mortgage rates up even if house prices soften.
- The Fed is continuing to reverse their former policy of keeping mortgage rates low through “Quantitative Easing.” Throttling back on their enormous holdings of mortgage-backed securities and other long-date bonds helps put more upward pressure on mortgage rates.
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