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The Federal Reserve is going to raise interest rates this week, but that doesn’t mean mortgage rates are going up.

Mortgage interest rates have been on a wild ride this year, climbing above 7% for several weeks in October and November. Recently, though, signs of cooling inflation have released some of that upward pressure, with the average for a 30-year fixed-rate mortgage now back down to 6.62%, according to a survey by Bankrate, which like NextAdvisor is owned by Red Ventures.  

“From a mortgage perspective, rates have actually gone down even though the Fed has raised rates. We would expect the worst is over. We think you’re going to see lower rates into the next year despite further rate hikes,” says JR Gondeck, partner and managing director with the Lerner Group, a financial advisory firm.

Experts and financial markets generally expect the Federal Reserve to hike its benchmark short-term interest rate, the federal funds rate, by 50 basis points this week. But experts say the next moves for mortgage interest rates depend more on the tone of Fed Chairman Jerome Powell’s projections for 2023. 

“It’s all about expectations,” says Odeta Kushi, deputy chief economist at First American Financial Corporation. “If the market is surprised by the Fed’s projections, we could see some movement in mortgage rates – whether that surprise is to the upside or the downside.” 

Housing costs make up a significant portion of consumer spending. In the Fed’s ongoing battle against inflation, which was at 7.7% year-over-year in October, the housing market is an important indicator. 

What Is the Federal Reserve Doing?

Since the start of 2022, the Fed has raised its federal funds rate from zero to 3.75% – one of the fastest rate hikes ever seen from the central bank. It’s all been in the name of taming inflation. 

“Inflation is, essentially, too much money chasing too few goods,” says Denis Poljak, co-founder of Poljak Group Wealth Management. 

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By raising rates, the Fed is making borrowing money more cost-prohibitive. Until they see a sustained downturn in consumer spending, and thus inflation, the Fed has stated they will continue with their rate hiking regime. 

Today’s inflationary environment didn’t happen overnight. It’s been gaining traction since the start of the pandemic, and the housing market is a prime example of this. 

The pandemic housing boom saw massive price growth as unparalleled demand was met with insufficient supply. Home price growth persisted until its peak in the middle of this year. Since then, prices have been slowly coming down as a result of high mortgage rates curbing demand. The housing market has been stuck in neutral recently, but falling home prices and stabilizing mortgage rates could help bring affordability within reach — especially for first-time homebuyers. 

How the Fed Affects Mortgage Rates

Mortgage rates aren’t directly correlated to the Fed’s actions. They both respond to inflation. 

 

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