- Fed rate hike: 0.25 percentage points (25 basis points)
- Economic projections point to one or more increases this year
- Unanimous decision
For the first time since July 2023, the Federal Reserve raised rates by one-quarter of a percentage point — the federal funds target range is 3.75% to 4.00%.
In defending the move, Fed Chair Kevin Warsh said, "We must be confident that underlying inflation is moving to our objective clearly and at sufficient speed. Today, the FOMC decided that this standard has not been satisfied."
On Wednesday afternoon, the 10-year treasury yield breached 5% and interest rate traders were split nearly 50/50 on whether the Fed will hold or raise rates at its next meeting in October. Weekly mortgage rates reached their highest level this week since May 2024, according to Mortgage News Daily.
The majority of Fed policymakers project at least one more hike this year.
What Wednesday’s decision means for mortgages
Mortgage rates this week are they highest they've been since May 2024. While mortgage lenders may have priced in today's hike prior to the announcement (it was widely anticipated), an increase in sentiment toward one or more hikes this year could send them higher yet.
For homebuyers and those looking to refinance, it may be prudent to lock in a relatively low rate now.
Impact on home buyers
While mortgage interest rates are a key element to housing affordability, it's also true that a higher interest rate environment can put downward pressure on home prices. Though rates may increase over the next several months, it's possible that home prices could correct and buyer competition could lessen.
To get a current read on mortgage rates, it's best to track long-term Treasury yields over the federal funds rate itself. The 10-year Treasury yield was at 5.00% on Wednesday afternoon, up nearly ⅓ of a percentage point since the Fed's prior meeting in July.
Impact on refinancing
Rate cuts were not signaled during today's Fed meeting; on the contrary, at least one additional hike was projected by the end of the year. In other words, if you intend to refinance, it may be prudent to lock in a rate now — especially if you’re in an ARM (adjustable rate mortgage).
Refinancing remains a tool to manage long-term risk and hedge against uncertainty. If inflation remains elevated or geopolitical risks persist, rates could stay higher for longer.
Economic factors that influence the Fed's decision
Cutting interest rates may seem like a no-brainer when you think of how much you might save on borrowing costs. But it’s not that simple. The Fed considers a slew of factors, the most significant are typically:
- Inflation: Whether core inflation is moving toward or away from the Fed’s 2% target.
- Labor market strength, weakness, and resiliency: Employment levels, wage growth, and signs of cooling or overheating are taken into account.
- Economic growth: GDP, consumer spending, and business investment that signal momentum or an economic slowdown.
- Financial and global risks: Market stability, tariffs, geopolitical tensions, and credit conditions that could threaten the economic outlook.
Fed rate cuts: benefits and risks
Benefits
Lower interest rates generally spur borrowing activity. A robust credit market not only makes it easier for you to refinance your mortgage, buy a new home, or borrow money in general, but it also makes it easier for businesses to expand and invest. In turn, businesses have lower borrowing costs, which can free up funds to hire additional employees. In other words, lower interest rates can reduce unemployment and potentially increase salaries.
Risks
As a result of more people having more disposable income, the cost of goods can also increase, a.k.a. inflation. When inflation rises, it makes it harder to afford basic necessities, like food or a roof over your head — especially if the cost of necessities rises faster than your salary.
The current housing affordability crisis is one example of this. Record-low mortgage rates during the pandemic (low borrowing costs, see above) plus a work-from-home revolution contributed to one of the fastest-growing housing markets ever.
What happens next with rates?
Today the Fed doubled down on its fight against inflation — if inflation doesn't improve in the short-term, we could see one (or more) additional hikes by year's end. The U.S. Bureau of Labor Statistics will release its next inflation reading October 14.
Note: While mortgage rates are affected by Fed rate decisions, the 10-year Treasury yield holds more sway. When the Fed cuts rates or a rate cut is expected, the 10-year yield can drop; the reverse is true for rate hikes. A key factor, however, is the price of oil, which feeds directly into inflation expectations — when oil rises, markets tend to anticipate higher inflation, pushing Treasury yields up and keeping mortgage rates elevated.
Explainers:
The "dot plot" is a shorthand term for a chart included in the Federal Open Market Committee's quarterly economic projections. The chart has 19 dots representing the members of the Board of Governors and the presidents of the regional banks that make up the FOMC. Each member anonymously puts a dot on the chart indicating where they think the federal funds rate should be in the future.
Being hawkish, in Fed-speak, refers to a board member or board that is more likely to favor tighter monetary policy and take a cautious approach to cutting rates in an effort to control inflation; being dovish refers to one that is more likely to favor a more aggressive approach on cutting rates as a way to spur economic growth.
FAQ
What is the federal funds rate?
Open
When will mortgage rates go down?
Open
How do mortgage rates affect home prices?
Open
