Will Mortgage Rates Go Up After the May Fed Meeting?

April 27, 2023 - 3 min read

Will mortgage rates rise after the Fed meets?

The Federal Reserve will hold its next Open Market Committee meeting on May 2-3 and with it will likely come another rate hike.

Annualized inflation remains too high, but came down from 6% in February to 5% in March. The FOMC wants to keep pulling that down, however, recent bank failures could have the same impacts as rate hikes on the economy overall (and the lending industry).

Following March’s FOMC meeting, Fed Chair Jerome Powell said the uncertainty in the financial sector will “likely to result in some tightening credit conditions for households and businesses and thereby weigh on demand, on the labor market, and on inflation. Such a tightening in financial conditions would work in the same direction as rate tightening.”

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Will the Fed stop raising rates in 2023?

The Fed has the responsibility of maintaining an inflation rate around 2% over time. Keeping inflation near that pace stabilizes prices for consumers and aids affordability. As the annualized rate of inflation climbed above 8% last year, the central bank devised a plan of hiking the federal funds rate to tame it.

After multiple hikes of 50 and 75 basis points, the FOMC raised its fed funds rate target by 25 basis points in February and again in March. The national inflation rate gradually dwindled for nine straight months, decreasing from June 2022’s 41-year high of 9.1% to 5% in March 2023, according to the U.S. Bureau of Labor Statistics.

Ahead of May’s FOMC meeting, signs point to another 25-point hike. It could also potentially be the final hike of the year, depending on the economic ramifications of the banking industry’s turmoil.

In a press release, Fannie Mae’s Economic and Strategic Research Group stated, “the tightening of financial conditions derived from the bank failures in many ways had the same effect that additional fed fund rate hikes would have had. As such, the ESR Group now expects only a single additional 25-basis point hike from the Federal Reserve in May, followed by the re-introduction of monetary easing closer to year-end.”

Interest rate growth could continue

Interest rates trended up and down thus far in 2023, with the average 30-year fixed mortgage ranging from 6.09% to 6.73%, according to Freddie Mac.

Although the annualized pace of inflation is falling, it’s still over 2.5 times higher than the Fed’s goal. Because of this, more hikes and tightening monetary policies could continue until inflation gets brought down to a normalized level.

Interest rates are notoriously difficult to predict but typically rise in response to Fed tightening. Because of the rapid rate growth we saw in 2022, some lenders will allow you to lock in a rate for 90 days at little or no cost so you’re protected from higher rates if you don’t close quickly.

A few examples of lenders offering this include AmeriSave Mortgage, Quicken Loans, and Rocket Mortgage.

Some lenders are even offering borrowers refinances without repeat lending fees or appraisal fees when rates eventually hit a down cycle. When mortgage shopping, be sure to ask your loan officer about these services.

Mortgage rates and the Fed’s role

The Federal Reserve doesn’t determine mortgage rates. Instead, rates are intrinsically tied to the Fed’s actions. Last year, the Fed announced plans to hike its federal funds rate at each of its meetings in 2022 and likely in 2023 as well.

The fed funds rate is the amount banks pay to borrow money from each other overnight and an increase signals higher inflation and economic expansion. Mortgage interest rates typically rise in response to growth in the fed funds rate.

How mortgage rates respond in the immediate aftermath of these FOMC meetings has been a mixed bag over the last 12 months. Most recently, they declined 18 basis points (0.18%) the day after the hike on March 22.

Advice for borrowers

Inflation has dissipated but the Fed will keep taking action to get it back down to around 2%.

While rates could grow in the near future, they’re still below average historically. Even if you missed out on the rock-bottom rates of 2020 and 2021, you can always refinance once they eventually come down. It’s also important to remember that many people build wealth through homeownership and home equity.

If you’re ready to apply for a mortgage, speak with a local lender to see what loan type and interest rate you can qualify for ahead of May’s Fed meeting.

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Paul Centopani
Authored By: Paul Centopani
The Mortgage Reports Editor
Paul Centopani is a writer and editor who started covering the lending and housing markets in 2018. Previous to joining The Mortgage Reports, he was a reporter for National Mortgage News. Paul grew up in Connecticut, graduated from Binghamton University and now lives in Chicago after a decade in New York and the D.C. area.