On Wednesday, the Fed raised interest rates, again. BUT, we are seeing the lowest rates (currently) in weeks! Confused?  In this blog article, we will explain the relationship between the Fed rate hike and mortgage rates in a way that's easy to understand for the average consumer.

Why the Fed Raises Rates: The Federal Reserve (or the Fed) hikes the Fed Funds Rate, which applies to loans between large institutions for periods of less than a day. The goal is to influence the cost of short-term capital, cooling demand for goods and services and reducing inflation. However, this doesn't directly translate to higher mortgage rates.

Mortgage Rates vs. Fed Rates: Mortgage rates typically apply to loans that last more than five years (before the home is sold or the loan is refinanced). This means they serve a very different purpose for investors and can move differently compared to shorter-term debt. But this isn't even the biggest reason for the disconnect between the Fed rate hike and mortgage rates.

Mortgage rates as of 5.4.2023

Market Expectations and Adjustments: The most obvious reason why a Fed rate hike can coexist with lower mortgage rates is that the bond market had already anticipated the rate hike and priced it into the current level of rates. The Fed can only change rates during eight meetings per year, so the market has plenty of time to adjust its expectations between these meetings.

Fed Verbiage and Economic Data: With the market already accounting for the rate hike, the bond market focuses on changes in the Fed's verbiage and comments from the Fed Chair during the post-announcement press conference. In this case, the message suggested the possibility of this being the last rate hike for a while, which the bond market appreciated.

Current Mortgage Rates: As a result of these factors, the average mortgage lender is offering rates at the lowest levels in roughly three weeks. Whether these rates continue to drop depends on upcoming economic data, such as Friday's jobs report and next week's Consumer Price Index (CPI).

It's essential to understand that the Fed rate hike doesn't automatically mean higher mortgage rates. By looking at the bigger picture and considering market expectations, Fed verbiage, and economic data, it's clear that mortgage rates can actually move lower in the face of a rate hike. Stay informed and make better decisions when it comes to your mortgage by keeping an eye on these factors.