The Ripple Effect: Federal Reserve’s Choices And The Journey To Homeownership

By Movement Mortgage |

The Federal Reserve is on a mission to manage inflation. Inflation refers to the general rise in prices of goods and services, and the Fed aims to keep it in check. While we’ve witnessed a full year of subdued inflation (as depicted in the graph below), the latest data indicates that it still surpasses the Fed’s target of 2%.

You might have hoped that the Fed would halt their interest rate hikes once they made strides in curbing inflation. However, they’re treading carefully to avoid stopping prematurely, as that could trigger another surge in inflation. To prevent this, the Fed recently opted to raise the Federal Funds Rate again. Jerome Powell, the Chair of the Fed, underscored their commitment to steering inflation back to the 2% goal and maintaining consistent, long-term inflation expectations.

Greg McBride, a financial expert at Bankrate, elaborates on how the Fed’s recent choice is influenced by the combination of elevated inflation and a robust economy. “Despite the resilient economy and robust job market, inflation stubbornly remains high,” explains McBride. “These factors might contribute to the persistence of high inflation, necessitating a more cautious approach by the Fed.”

It’s crucial to note that although a hike in the Federal Funds Rate by the Fed doesn’t directly dictate mortgage rates, it does wield an influence. A recent Fortune article clarifies,”The federal funds rate is the interest rate at which banks lend money to each other […] When inflation is high, the Fed raises rates to make borrowing more expensive and slow down the economy. When inflation is low, they lower rates to encourage borrowing and stimulate economic activity.”

In simpler terms, when inflation is elevated, mortgage rates also tend to rise. However, should the Fed succeed in reining in inflation, it could eventually lead to lower mortgage rates. This, in turn, might render purchasing a home more affordable.

As inflation gradually subsides, historical patterns suggest that mortgage rates are likely to follow suit. Greg McBride forecasts the trajectory of mortgage rates, “With the easing pressure of inflation, we can expect more consistent declines in mortgage rates throughout the year, especially if the economy and job market show signs of slowing down.”

Looking forward to 2024, industry experts anticipate a prolonged scarcity of available homes for the next few years. This scarcity will continue to contribute to elevated home values. When coupled with a steady job market, it could set the stage for economic growth, potentially leading to reduced mortgage rates and tax incentives aimed at spurring home sales.

So, if you’re monitoring the housing market, bear in mind that the Federal Reserve’s choices, their efforts to manage inflation, and the ensuing impact on mortgage rates are all interconnected components that could shape the homebuying journey.