Fed hikes rates by half a point, mortgage rates could follow

May 4, 2022 - 3 min read

Taming inflation with a historic rate hike

The Federal Reserve’s fight against inflation resulted in its largest rate hike in 22 years.

The ongoing Russian invasion of Ukraine, China’s Covid lockdowns, and supply chain issues keep upward pressure on inflation and the central bank is once again taking action to offset it.

The Fed raised the target fed funds rate at its May meeting and plans to raise it further following each of the year’s five remaining FOMC meetings.

Any borrowers looking to refinance or buy a home should act quickly before interest rates likely increase over the course of 2022.

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The Fed’s role and the latest FOMC meeting

The Federal Reserve doesn’t actually determine mortgage interest rates. Rather, mortgage rate movement closely correlates with the Fed’s policy actions.

Due to decades-high inflation and pandemic-related supply imbalances, the central bank is tightening its policies further.

It announced at its FOMC May 4 meeting a 50 basis point (0.5%) increase to the target range of its federal funds rate — the largest expansion since 2000. This jump came without surprise as Fed Reserve Chairman Jerome Powell previously said in April that, “additional 50 basis point increases should be on the table at the next couple of meetings.”

The Fed will also move forward with its plan to reduce its balance sheet. It will roll off $30 billion in Treasury holdings and $17.5 billion in mortgage-backed securities (MBS) each month from June to August, then double those amounts beginning in September.

“The message is clear; it’s imperative to get inflation under control and the Fed will act aggressively to do so,” said First American deputy chief economist Odeta Kushi. “Whether or not the housing market will be ‘quantitatively uneasy’ with allowing $35 billion in MBS to run off the balance sheet each month will depend on MBS demand, which will dictate whether mortgage rates go up much more.”

Mortgage rate growth could slow, for now

The FOMC reiterated its need to take a firm stance with its monetary policy. As inflation, employment and household spending all remain elevated, it felt an aggressive hike and MBS selloff were appropriate.

Although rises in the Fed rate normally precede mortgage interest rate growth, lending markets may have already accounted for May’s hike.

These measures indicate economic expansion and combat high inflation. They were also telegraphed in previous meetings, so they come as expected. Although rises in the Fed rate normally precede mortgage rate growth, lending markets may have already accounted for May’s hike.

“MBA is forecasting that mortgage rates are likely to plateau near current levels,” said Mortgage Bankers Association SVP and Chief Economist Mike Fratantoni. “The financial markets have attempted to price in the impact of Fed actions over this cycle, and they are likely also pricing in the economic slowdown that will result.”

While this move by the Fed may have already been baked in by lenders, similarly large hikes are anticipated for each of the remaining FOMC meetings in 2022 — hikes not yet factored into the market.

What this means for borrowers

Rapid interest rate growth has thus far defined 2022 lending — something that could actually help bring balance to the extreme seller’s housing market.

While the MBA predicts tepid interest rate movement following the latest FOMC news, that could be short lived.

The FOMC meets five more times this year with hikes expected to follow each of them. The next committee meeting falls on June 14-15, so if you’re looking to buy or refinance, move quickly.

Bottom line: the most likely outcome is interest rates may never be lower than they are right now.

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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.