Key Takeaways
- The Federal Reserve announced its fourth consecutive rate hold yesterday. It last raised the federal funds rate in July.
- Fed rate moves do not directly drive mortgage rates. But they often create a domino effect that ultimately impacts the rates lenders are willing to offer.
- One of the biggest drivers of mortgage rates is inflation, which is still above the Fed’s 2% target level.
- Mortgage rates climbed to a 20-year high in October, but have since dropped almost 1.5 percentage points.
- The Fed signaled yesterday that its rate-hike campaign is almost certainly over. But it indicated it likely won’t begin reducing rates until May or later.
The Web of Factors That Impact Mortgage Rates
It’s a commonly drawn conclusion that when the Federal Reserve raises interest rates—as it did aggressively during 2022 and 2023—mortgage rates are pushed higher. And conversely, when the Fed lowers rates, mortgage rates will fall, too. So does another rate hold by the Fed, announced yesterday, mean mortgage rates will march in place?
Unfortunately, the relationship between the Fed and what lenders are offering is not quite so clear. Instead, moves by the central bank more directly impact short-term rates, like deposit rates at the bank and credit card and personal loan interest rates.
Since fixed mortgages offer a long-term rate, the linkage to the Fed’s moves is a bit more tenuous. And in fact, mortgage rates and the federal funds rate can—and sometimes do—move in opposite directions. Beyond the Fed’s benchmark rate, the mortgage lending market is affected by a complex mix of many economic factors. These include inflation, consumer demand, housing supply, the strength of the current economy, and the status of the bond market, especially 10-year Treasury yields.
However, given the historic speed and magnitude of the Fed’s 2022–2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even an indirect influence from the fed funds rate resulted in an equally historic upward impact on mortgage rates over the last two years.
The Fed Is On Hold, But Mortgage Rates Have Fallen
In the mortgage history books, 2023 will go down as an especially painful year for homebuyers. Granted, 30-year mortgage rates rose faster in 2022. After sinking to historic lows in the 2–3% range in 2021, the next year saw 30-year rates shoot above 7%. The pace of 2022 increases was breathtaking.
But 2023 showed that mortgage rates still had more room to run. Though the 30-year average wavered in 6% territory for most of the first half of 2023, by October the flagship mortgage average had catapulted to an astonishing 8.45%—its highest mark in 22 years.
Fortunately, though mortgage rates are still historically elevated, they have dropped considerably since October. Over the last five weeks, in particular, they have dipped below the 7% mark four times. The current average is almost 1.5 percentage points below the 8.45% peak of last fall.
But why is this happening, after the Fed has opted to hold rates steady for its last four consecutive meetings? The federal funds rate was raised to 5.25% in July 2023 and remains there. Yet mortgage rates have been dropping.
One of the primary reasons centers on inflation. In June 2022, inflation hit a 40-year high of 9.1%. But the Fed’s rate-hike campaign had inflation directly in its crosshairs, and it has successfully lowered inflation to 3.4% so far, as of the December reading. So while the Fed has not yet decided to start lowering rates, the inflation-fighting work it’s already accomplished is putting downward pressure on mortgage rates.
Sam Khater, Freddie Mac’s Chief Economist, puts it this way: “With continued deceleration in inflation, we expect [mortgage] rates to decline further. The economy continues to outperform due to solid job and income growth, while household formation is increasing at rates above pre-pandemic levels. These favorable factors should provide strong fundamental support to the market in the months ahead.”
What 2024 Fed Moves Could Mean for Mortgages
Yesterday’s post-meeting statement from the Fed signaled that we have almost certainly reached the end of rate hikes in this campaign. However, Fed Chair Jerome Powell stated that because inflation is still too high, the committee will proceed cautiously in deciding when to make an initial rate cut.
The next rate-setting meeting for the central bank will conclude on March 20. In his post-announcement press conference yesterday, Chair Powell said, “I don’t think it’s likely the committee will reach a level of confidence (to reduce rates) by the time of the March meeting.” This suggests that the earliest we’d see a Fed rate cut is probably the May meeting, which will conclude on May 1.
In other words, we’re likely to be in a Fed rate hold pattern for three months, or even more, as the Fed will make each rate decision meeting by meeting based on the freshest economic data. The next meeting scheduled after May will conclude on June 12.
However, “dot plot” data released by the Fed in December showed almost 80% of Fed members expect there to be two to four rate cuts in 2024, with the median expectation being three rate decreases totaling 0.75%.
Cuts by the Fed will be a sign not only that inflation has come down further, but also that the Fed believes the inflation rate has stabilized. This decreased inflationary pressure, plus the added impact of a falling federal funds rate later in 2024, is likely to push mortgage rates lower. But while the Fed raised its benchmark rate fast and furiously in 2022–2023, it’s expected to bring rates down at a much more gradual pace in 2024 and beyond. As a result, mortgage rate improvements are also expected to be more gradual this year than dramatic.
How We Track the Best Mortgage Rates
To assess mortgage rates, we first needed to create a credit profile. This profile included a credit score ranging from 700 to 760 with a property loan-to-value ratio (LTV) of 80%. With this profile, we averaged the lowest rates offered by more than 200 of the nation’s top lenders. These rates represent what real consumers will see when shopping for a mortgage.
The same credit profile was used for the best state rates map. We then found the lowest rate currently offered by a surveyed lender in that state.
Remember that mortgage rates may change daily, and this average rate data is intended for informational purposes only. A person’s personal credit and income profile will be the deciding factors in what loan rates and terms they can get. Loan rates do not include amounts for taxes or insurance premiums, and individual lender terms will apply.
