The Federal Reserve, as expected, announced on Wednesday that it would raise its benchmark interest rate by 0.5%. This is the fifth interest rate hike of the year, as the Federal Reserve previously hiked rates by 0.75% four times in 2022. During their announcement, the Fed signaled that there may be more rate hikes in 2023. However, the fact that the latest rate hike was smaller than previous increases signals that inflation is trending in the right direction, even if it is much higher than the historical average of around 2-3%.
The Fed aims to use the rate hikes to slow down inflation and return the Consumer Price Index (CPI) to a normal annual rate of roughly 2.0%. In November, inflation increased by only 0.1% from October. On a yearly basis, prices were 7.1% higher than in November 2021.
Jerome Powell, Chair of the Federal Reserve, admitted that the latest string of rate hikes would likely slow down the economy and cost some Americans their jobs. Many economists predict that the rate hikes could even push the United States into a recession. However, he deemed the decision necessary to restore the American economy to a place of normality.
“I wish there was a painless way to restore price stability,” Powell said in a press conference. “There isn’t.”
How Will the Housing Market Respond?
Economists generally say that rates have already accounted for the Federal Reserve’s actions. The one caveat is that mortgage rates could spike if the Fed raises rates more than expected.
“I think a lot of the Fed’s actions have already been baked into mortgage rates. With that said, if the Fed takes a more hawkish tone than markets anticipate, we could see some upward movement in mortgage rates,” Odeta Kushi, deputy chief economist at First American Financial Corporation, told Time.
Prospective homebuyers shouldn’t expect mortgage rates to rise based on the Federal Reserve’s latest decision to raise its benchmark interest rate. Mortgage rates have declined over the last four weeks despite widespread anticipation of another Fed hike. On November 10, the average 30-year fixed-rate mortgage was 7.08%, but it fell to 6.33% on December 8th.
Most economists expect the 30-year fixed-rate mortgage to stay above 6.0% in 2023. Freddie Mac’s forecast, for example, predicts that the 30-year will remain at a median of 6.4% next year. Predictions from economists suggest that homebuyers should not wait for mortgage rates to fall significantly before purchasing a home, as it may take years for rates to decrease.
Consumers who are worried about high rates should check with their mortgage provider to ensure that they have the option of refinancing when rates decline in the future. There are also ways for homebuyers to secure a lower mortgage rate, such as making a larger down payment or choosing a shorter loan term.
