As Fed Pauses Rate Hikes, Mortgage Rates Could Stabilize

Home buyers looking for mortgage rates to stabilize or even drop got good news Wednesday, as the Federal Reserve announced a pause in its monthslong campaign of interest rate hikes.

The Fed controls the federal funds rate, a metric that directly affects short-term lending. But holding that key rate steady should filter through to other interest rates, including longer-term ones like mortgage rates. After a turbulent spring, with mortgage rates pingponging up and down as economic crises came and went, the central bankers' pause could provide a bit of relief.

Why the Fed took a break

After determining rising inflation wasn't just a temporary feature of the post-COVID-19 economy, the Fed began raising the federal funds rate in March 2022. The rate of inflation peaked at 9.1% in June 2022, the highest level in decades and substantially above the central bankers' goal of 2%.

Changing the federal funds rate — the interest rate banks charge each other for overnight borrowing — is the Fed's main tool for attempting to control inflation. Making this type of borrowing more costly makes borrowing more expensive across the board, which should slow down overall spending and price increases. But there’s a lag between the action and its desired effects.

David Bieri, an economist and associate professor at the Virginia Tech School of Public and International Affairs, compares raising the funds rate to using the brakes on a car — but with a twist. "The problem with hitting that brake is imagine you're driving a car and you will only find with a certain amount of delay whether the brakes are actually gripping," he explains.

The Fed has been pumping the brakes for months, but it has been hard to tell how much the car's slowing down. Though the consumer price index, which measures the rate of inflation, has decreased to 4%, other economic data has been mixed. This pause buys the Fed a bit more time to evaluate the road ahead before making its next move.

Implications for mortgage rates

In addition to the Fed’s moves, persistent inflation and economic events like several bank failures and lengthy debt ceiling negotiations have contributed to a tumultuous spring for mortgage rates. Though interest rates on 30-year fixed-rate home loans have remained mostly in the 6% range, there has been considerable day-to-day volatility.

"There are too many other factors that are providing negative influence on mortgage rates at the moment that they don't need anyone else's help," says Melissa Cohn, a regional vice president and mortgage banker at William Raveis Mortgage based in New York City.

In the near term, mortgage rates could pause alongside the Fed, or even drop slightly, given the lack of immediate upward pressure. The longer-term outlook depends considerably on how long the central bankers' pause lasts. It could be as short as six weeks — more of a skip than a pause — if they choose to hike again at the July meeting. On the other hand, the bankers could decide they'd like to hold interest rates at this level for a while. A quick skip could mean a rate rebound; a longer pause might see mortgage rates fall.

One outcome not to expect is a rate cut. Fed officials have indicated a cut is not on the horizon, much as markets might like to see one.