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Posted on Tuesday, February 1, 2022 in Mortgage Lending

How Fed Hikes Could Affect Mortgage Rates

The U.S. Federal Reserve (Fed) has signaled that it will begin raising its benchmark interest rate as soon as March 2022 and may increase that rate a few additional times this year. Our country’s high inflation rate is one of the major factors driving a potential rate increase.

Any rate increases could affect consumer lending rates, including mortgage loans.

Inflation and the Economy

Inflation isn’t always bad news. A little bit is quite healthy for an economy. But higher-than-normal inflation can be a bad sign for the economy. If inflation stays elevated for too long, the economy can suffer from hyperinflation. Hyperinflation is a phenomenon where there are rapid, excessive, and out-of-control general price increases in the economy, which reduces the value of the dollar in your pocket.

Annual Inflation Rate

According to the U.S. Labor Department’s inflation report published Jan. 12, 2022, the annual inflation rate for the United States is 7.0% for the 12 months ended December 2021, which is the highest rate since June 1982. The next inflation update is scheduled for release Feb. 10, 2022. It will offer the rate of inflation over the 12 months ended January 2022.

Since 2012, the Fed has targeted inflation at 2.0%. Keeping inflation low is one of the Fed’s primary objectives, along with stable, low unemployment levels. Inflation levels of 1.0% to 2.0% per year are considered acceptable, while inflation rates beyond 3.0% could cause the U.S. currency to become devalued.

At 7.0%, inflation is surging well beyond the Fed’s 2.0% target. Fed Chair Jerome Powell told the Senate Banking Committee on January 11, 2022, “High inflation is a severe threat to the achievement of maximum employment.”

Target Federal Funds Rate

At its January 2022 meeting, the Fed maintained its target for the federal funds rate (the benchmark for most interest rates) at a range of 0% to 0.25%. However, the Federal Open Market Committee (FOMC) said that "with inflation well above 2% and a strong labor market," it expects that the time will soon be right to raise the target fed funds rate.

The FOMC's explicit goals are to promote maximum employment, stable prices, and moderate long-term interest rates.

The Fed first lowered the targeted federal funds rate to almost 0% on March 16, 2020, after the pandemic-related recession began. Their objective was to support the economy by enabling more borrowing and spending. In addition, they were attempting to reach a point where inflation averages 2% over the long term by allowing inflation to rise moderately above 2% in the short term.

The Fed uses interest rates like a spigot, turned on or off to either grow the economy or put the brakes on it. If the economy slows, the FOMC lowers interest rates to make it less expensive for businesses to borrow, invest, and create jobs. Lower interest rates also allow consumers to borrow and spend more, which helps spur the economy.

In reverse, if the economy is growing too fast and inflation is heating up, the Fed will raise interest rates to curtail spending and borrowing.

How the Fed Rate Affects Consumer Loans

The fed funds rate is critically tied to the U.S. economic outlook. It directly influences prevailing interest rates such as the prime rate and affects what consumers are charged on credit cards, loans, and mortgages.

Therefore, if the Fed increases interest rates in March or multiple times this year as alluded, it will likely make mortgage loans more expensive.

Turn to a Mortgage Expert

Finding the right mortgage lending expert to help you understand current mortgage interest rates doesn’t have to be hard. Contact one of First National Bank’s mortgage lenders in Ames, Ankeny, the Des Moines metro or Osceola. They offer free consultations to persons looking to buy a home, construct a new home, refinance their existing home, or are interested in utilizing the equity in their home.

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