Fed Makes 25-Point Hike in May. Is This Good News for Mortgage Rates?

May 3, 2023 - 3 min read

Is the Fed finished raising interest rates?

The Federal Reserve concluded its May meeting by continuing its strategy from February and March.

The central bank hiked the federal funds rate by 25 basis points (0.25%) in order to keep bringing down inflation. However, with inflation dissipating and economic indicators showing pullback, this could be the last hike of the year.

“We expect this is the peak rate for this cycle, and potential homebuyers and their mortgage lenders may be breathing a sigh of relief,” said Mortgage Bankers Association Chief Economist Mike Fratantoni.

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The Fed’s role and May’s FOMC meeting

The Fed doesn’t set mortgage interest rates. Mortgage rates hinge on several factors, but they do intrinsically correlate with the central bank’s policy actions.

The Federal Open Market Committee (FOMC) concluded its May 3 meeting with a 25-basis point (0.25%) target range increase to the federal funds rate. It marks the tenth consecutive FOMC hike, one many industry experts both anticipated and believe may be the last of 2023.

The national inflation rate gradually decreased for nine straight months, from June 2022’s 41-year high of 9.1% to 5% in March 2023, according to the U.S. Bureau of Labor Statistics. With unrest in the banking sector bringing recession concerns, it could be enough to help reduce inflation back to normal levels.

Of course, the FOMC said in its press release that it’s prepared to adjust its monetary policy based on incoming economic implications or emerging risks.

“We expect that the Fed will be ‘data dependent,’ and certainly would react to any renewed increase in inflation, but today’s [Fed] statement is consistent with a plan to pause rates at this level. Inflation is likely to trend down over the course of the year, particularly as weakness in the rental market begins to be reflected in the inflation numbers,” Fratantoni continued.

The FOMC’s goal is to keep the long-term average annual rate of inflation near 2% and the next meeting comes on June 13-14.

How will mortgage rates react?

With turmoil in the banking sector, interest rate movement has been milder in recent times.

Since reaching 2023’s high water mark of 6.73% on March 9, the average 30-year fixed-rate mortgage (FRM) mostly followed a downward trajectory. The latest data from Freddie Mac showed it settled at 6.43% on April 27.

Interest rates typically rise alongside increases to the fed funds rate and run off of balance sheet holdings. With this relatively small — and potentially 2023’s final — hike, mortgage rates could decline amongst the financial market uncertainty.

We’ve seen mixed results in the immediate aftermath for this series of rate hikes. Most recently, the average 30-year FRM decreased four basis points (0.04%) and 18 basis points (0.18%), respectively, the day after the hikes on Feb. 1 and March 22.

“We continue to expect that mortgage rates will drift down over the course of the year as the economy slows, as we move closer to the Fed lowering rates beginning in 2024, and as financial market volatility finally begins to settle down,” Fratantoni said.

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Is it a good idea to lock in a mortgage rate?

The FOMC’s latest action signals a downtrend for inflation and, in turn, interest rates.

While mortgage rate movements can be hard to predict due to their highly volatile nature, economic indicators point to the U.S. entering a recession this year — which should lead to decreasing rates.

However, projecting mortgage rates and trying to time the market can often be a fool’s errand since there are never any guarantees. But one guarantee is the sooner you lock in a mortgage, the sooner your home equity clock starts.

If you’re ready to become a homeowner, reach out to a lending professional to see what rate and loan type you can qualify for.

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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.