How big is the FED rate interest hike and how will it affect loans and mortgages?

The Federal Reserve began raising interest rates last March to slow rising inflation in the US economy. After easing into its first rate hike in two years with a quarter of a percentage point increase, policy makers went full throttle, first with a half percentage point hike, then three straight 75 basis point increase before they met this week as inflation continued to stay persistently high.

The jump in overnight rates for lending have had the knock-on effect of raising the cost of borrowing for businesses and ordinary Americans. The majority of Americans that have felt this are those looking to take out a mortgage to buy a home while prices have reached record highs and those with non-fixed interest rate credit payments.

Their decision to increase interest rates by a further three quarters of a percentage point will continue making buying a home more expensive. However, the policymakers signaled what factors may lead to a slowdown in their aggressive campaign to crush inflation.

The Federal Reserve raising rates to bring inflation to heel

The US economy is not alone in experiencing high inflation, Europe hit a record 10.7% rise in consumer prices in October, the highest since the adoption of the common currency. Like their US counterparts, the European Central Bank has been moving to slow the pace of rising prices with a planned second 75 basis points hike. The first in September hadn’t been instituted since 1999 during the early days of the Eurozone.

The central banks’ aggressive moves to stomp out persistently high inflation are directed at the wider economy by raising borrowing costs to reduce demand. And while inflation appears to have peaked in the US in June at 9.1%, September’s reading, which showed a slight drop to 8.2% from the month before, was still above expectations.

Fed chairman Jerome Powell signaled that policymakers could enact smaller hikes in the future to account for the the steps it has institued so far. “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the policy-setting Federal Open Market Committee said at the end of their two-day meeting.

How will the FED rate interest hike affect loans and mortgages?

The most affected so far by the rate hikes has been the housing sector with activity slowing in many markets across the nation. However, the labor market remains tight with unemployment dropping to 3.5% and GDP increasing in the third quarter by 2.6% on the back of strong consumer demand.

Last week the rate on the most common mortgage, a conventional thirty-year fixed-rate mortgage, jumped above 7% for the first time in 20 years. Rates have risen steeply, rocketing up from below 3% in July 2021, as the Fed has moved to quell inflation. Additionally, homebuyers have been confronting ever increasing prices on houses, jumping from a national average of $473,000 to $542,000 in the span of a year, a nearly 15% increase, according to the St Louis Federal Reserve.

With the Feds latest rate increase and continuing inflation the experts say that “we’re not out of the woods” yet. Homebuyers could expect to see the 30-year mortgage rate keep climbing through November possibly hitting 8%, with expectations somewhere in the seven percent range.