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Why The Latest Fed Rate Hike Might Not Change Much For Mortgage Rates That Are Already Above 6%

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Why The Latest Fed Rate Hike Might Not Change Much For Mortgage Rates That Are Already Above 6%

Credit: Taehoon Kim/Bloomberg via Getty Images

A sold home in North Vancouver, British Columbia, on Sept. 13, 2022. Higher interest rates are affecting housing markets worldwide. In the United States, another increase in rates by the Federal Reserve could further slow demand for homes.

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Key Takeaways

  • Mortgage rates continued to surge this week, with the average rate for a 30-year fixed rate loan hitting 6.35%.
  • Rates are at their highest level since 2008, rising in anticipation of this week’s rate hike by the Federal Reserve.
  • The Fed’s increase of 75 basis points in its benchmark rate won’t have a direct impact on mortgage rates, experts say.

The Federal Reserve ratcheted up its key interest rate Wednesday, but that might not make much of a difference for mortgage rates that are already at their highest level in more than a decade. 

The central bank opted for a third consecutive increase of 75 basis points for its benchmark short-term rate in an ongoing attempt to stifle high inflation. 

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The consumer price index (CPI) was up 8.3% year-over-year in August, and while that was lower than the 8.5% seen in July and 9.1% in June, it was still higher than expected. “A lot of people thought we might have hit a peak, so the CPI was expected to be softer this time — not by much, but instead it went up,” says Nicole Rueth, producing branch manager with the Rueth Team Powered by OneTrust Home Loans. 

The Fed’s effect on mortgage rates isn’t direct, and experts say mortgage rates have risen in anticipation of aggressive steps taken by the Fed in raising its key rate, the federal funds rate. That rate is a short-term one that affects what banks pay when they lend each other money; when it goes up, costs for banks rise and it makes them raise costs for consumer debt. 

Rates continued to surge above 6%, hitting 6.35% this week in a survey by Bankrate, which, like NextAdvisor, is owned by Red Ventures. 

When the rate for a 30-year, fixed-rate mortgage jumped above 6% for the first time since 2008 this month, experts weren’t particularly surprised. The surge was in anticipation of the Fed’s latest hike, meaning mortgage rates have likely already baked in this change. The Fed’s official announcement is largely confirmation of what experts already knew was coming.  

Here are the average mortgage rates as of Sept. 21, 2022: 

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Loan Type This Week’s Rate Last Week’s Rate Difference
30-Year Fixed 6.35% 6.12% 0.23
15-Year Fixed 5.43% 5.30% 0.13
7/1 Adjustable Rate 5.18% 4.87% 0.31

How These Rates Are Calculated

These figures come from a weekly survey by Bankrate, which like NextAdvisor is owned by Red Ventures.

What is the Fed Doing?  

Current levels of inflation have blown price stability out of the water. By making it more expensive to borrow money, the Fed’s goal is to bring stability by discouraging spending – a task proving to be easier said than done. Consumers’ budgets are being stretched thinner and thinner, but they haven’t stopped spending. “The only way to curb inflation is to stop the incessant spending of American consumers,” says Rueth. 

The Fed is expected to keep raising rates until inflation comes under control. “Today’s rate hike announcement confirms that the Federal Reserve is committed to raising rates until inflation goes down,” says Michele Raneri, vice president of U.S. research and consulting at TransUnion.

The danger that comes with slowing economic growth is that it could lead to a full-blown recession. Aiming instead for a soft landing, the Fed went with 75 basis points rather than a full percentage point. 

Rate hikes like today’s won’t be going anywhere soon. Until the Fed sees inflation cooling off, they will continue to raise their rate to slow consumer spending. “Inflation is absolutely in the driver’s seat, particularly as it pertains to mortgage rates. Until we get some sustained evidence that inflation is beginning to recede, the upward pressure on mortgage rates will remain,” says Odeta Kushi, deputy chief economist at First American Financial Corporation.

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Pro Tip

When the Fed hikes rates, you’ll see interest rates on savings start to go up, meaning you’ll see higher returns from your savings account or CDs

How the Fed Affects Mortgage Rates 

Homebuyers should expect mortgage rates to continue fluctuating. While today’s rate hike may already be baked into the market, “The big thing is that rates move as quickly as expectations do and with the CPI as a precedent, it wouldn’t be surprising if they move again,” says Daryl Fairweather, chief economist at Redfin, a national real estate brokerage.  

Mortgage rates are generally set based on the prices of mortgage-backed securities – bonds secured by mortgages. “Strong inflation numbers have never been good for mortgage bonds, which means the mortgage rates are going to trend higher,” says Shashank Shekhar, founder and CEO of InstaMortgage.  

By proactively accounting for the Fed’s decision, experts hope consumers can have a smoother experience, “We don’t want to create sticker shock for buyers and shut down the marketplace,” says Eileen Derks, head of mortgage at Laurel Road, an online lender owned by KeyBank that specializes in serving health care professionals.

If the Fed’s plan to tame inflation works, mortgage rates may trend down in the coming years, experts say.

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High Mortgage Rates Are Deterring Potential Home Sellers 

Everyone across the income spectrum is grappling with what the Fed’s rate hikes mean for their personal finances – including fast-rising rates for savings accounts. But things get particularly confusing when it comes to the housing market, which has swung back from last year’s extreme sellers’ market.  

The Fed’s efforts to cool inflation are maintaining the upward pressure on mortgage rates that has caused the housing market to soften. According to the National Association of Realtors (NAR), the housing market saw its seventh consecutive month of decreased home sales in August – dropping 0.4% from July and nearly 20% from August 2021.

High mortgage rates might discourage both potential homebuyers and potential sellers. “Homeowners are going to be rate-locked into their homes and buyers might be hesitant to enter the market,” says Kushi.  

Most homeowners – 85% of those with mortgages – have an interest rate well below 6%, according to a Redfin analysis of Federal Housing Finance Agency (FHFA) data.  This could influence housing supply as some homeowners are reluctant to move “because selling their home and buying another could mean giving up their low mortgage rate,” in exchange for a higher monthly payment, according to Redfin. 

Kushi describes this phenomenon as “the golden handcuffs of low mortgage rates.”  

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How Homebuyers Can Deal with High Rates

The current environment may be especially intimidating for first-time homebuyers, but that doesn’t mean it’s unrealistic to buy. “It’s always a good time to buy a home, if that’s what is important to you. It’s just about doing your research and making good informed decisions,” says Derks. 

Yes, mortgage rates are significantly higher than they were a year ago. But on the flip side, home prices are decreasing, and the market is significantly less competitive than it was a year ago.  

“If you have a job and your credit is fine, you should be able to refinance in a few years. So, there isn’t a ton you need to be worrying over when it comes to a higher interest rate,” says Shekhar.  

This level of inflation won’t last forever, just longer than any of us would like. In fact, the housing market is already beginning to balance out as it adjusts to regular rate hikes from the Fed. “Be patient, but don’t necessarily be discouraged,” says Kushi.  

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How The Latest Fed Rate Increase Could Impact Crypto Prices, Based On These 3 Charts

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How The Latest Fed Rate Increase Could Impact Crypto Prices, Based On These 3 Charts

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Chairman of the U.S. Federal Reserve Jerome Powell and his colleagues held a two-day meeting this week, at which they decided to raise the federal funds interest rate by 75 basis points.

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If your crypto investments see some extra volatility this week, you can thank the Federal Reserve. 

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That’s because the Federal Reserve just announced another big rate increase as it continues its effort to squash stubborn inflation. The Fed raised interest rates by 0.75% on Wednesday, the fourth consecutive increase since the start of the year.

If it’s anything like the last few Fed meetings, crypto investors could be in for another rollercoaster this week. Historic price charts show how bitcoin’s price dropped by at least 10% or more following the last three Fed meetings in March, May, and June. 

Here’s a closer look:

Bitcoin’s price briefly declined during the week of March 13, the same week as the Fed’s second meeting this year, before climbing back up. The Fed approved a 0.25% rate hike, which was the first increase since 2018.
Bitcoin’s price spiked immediately after the Fed’s meeting on May 3 and 4, but then began to decline significantly on May 6. The Fed in May approved a half percentage point hike and laid out a plan, starting in June, to reduce the central bank’s $9 trillion balance sheet. 
Bitcoin’s price dipped as low as $17,500 following the Fed’s two-day meeting on June 14 and 15. The Fed raised interest rates by 0.75%. 

While historic data doesn’t clearly indicate how markets will react in the future, especially in the volatile and unpredictable crypto market, experts largely agree that investors should expect new volatility this week following the Fed’s rate increase announcement. Sentiment in the crypto market appeared slightly bearish to start the week, though crypto prices climbed immediately following the announcement. Bitcoin is trading around $22,000 and ethereum trading above $1,500 as of Wednesday afternoon, both up more than 5% in the last 24 hours.

“In the near term, we’ve seen bitcoin and other cryptocurrencies generally sell-off with risk assets as the speculative frenzy that defined investing over 2020 and 2021 grinds to a halt,” says Stéphane Ouellette, CFA and founder of FRNT Financial, an institutional capital markets and advisory platform focused on digital assets.

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This is happening against the backdrop of mounting recession fears which makes this week’s second-quarter GDP report and earnings reports all the more important. If the second-quarter GDP report on Thursday reveals that the U.S. is in a technical recession, which is defined as two consecutive quarters of negative economic growth, it could lead to “a bunch of mess” in the crypto market, according to crypto expert Wendy O.

“We do know that it’s rumored that we are going to increase rates by 75 basis points. If they only release rates at 75 basis points, we shouldn’t see any type of bad things happening in the market,” O says. “But at the same time, it could get canceled out when the second-quarter GDP report is released.”

How the Fed Meeting Can Affect the Crypto Market 

Aggressive rate hikes are not positive for crypto prices, and experts say the choppiness will likely continue in the short term. 

Risky assets like stock and crypto have been heavily correlated since the start of 2022. Both have been moving in unison and have struggled to gain any momentum this year as investors are pulling away in response to rising interest rates, surging inflation, and a potential recession. If the stock market dips because of the rate hike this week, the crypto market likely will too — and vice versa.

The Fed’s interest rate hike in June was one of many factors that rocked the crypto market in particular, which was already in “crypto winter” mode with prices slashed across the board. Bitcoin and ethereum fell down more than 70% in June since the peak of last year’s bull run. 

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Investors are keeping a close eye on bitcoin, ethereum, and the crypto market at large to see “possible retest of the June lows,” according to Edward Moya, a senior market analyst at Oanda.

“The majority of crypto watchers are still awaiting further weakness,” Moya says. “As global recession calls grow, the focus will switch to how soon the Fed will be cutting rates.”

It’s difficult to know whether the market has already priced in this week’s potential rate increase, says Joshua Fernando, crypto expert and CEO of eCarbon, a blockchain tech company focused on carbon emissions allowances.

“75 basis points appears to be the consensus, so if we see something notably higher and it kills the equity market, then I would expect the crypto market to follow suit,” Fernando says. “Vice versa in the lower rate increase case. More important will be the guidance the Fed gives. If the Fed signals strong rate hikes through 2023, expect more pain in the markets.”

What Does the Fed Meeting Mean for Crypto Investors?

Any significant developments with the Fed, corporate company earnings, or the second-quarter GDP report this week shouldn’t drastically alter your long-term crypto investment strategy. 

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If anything, it’s a reminder for investors that crypto assets come with additional risk and volatility, especially in times of economic and political uncertainty. Despite the positive momentum over the last week, the crypto market is still no where near where the highs it reached last year — with bitcoin and ethereum still down more than 50% since November. 

Given the crypto’s history of volatility, prices are just as likely to fall back down as they are to continue climbing — and it’s extremely difficult to predict with certainty where they’ll go next. 

With so much economic uncertainty in the air, now is the best time to play it safe by allocating no more than 5% of crypto to your investment portfolio and investing only what you’re OK with losing. Always make sure your financial bases are covered — from your retirement accounts to emergency savings — before putting any extra cash into a volatile, speculative asset like crypto.

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The Latest Fed Rate Hike Is The Largest In 28 Years. Here’s The Silver Lining For Savers

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The Latest Fed Rate Hike Is The Largest In 28 Years. Here’s The Silver Lining For Savers

Drew Angerer/Getty Images

U.S. Federal Reserve Board Chairman Jerome Powell speaks at a news conference following the Federal Open Market Committee (FOMC) meeting on June 15, 2022 in Washington, DC. The Federal Reserve raised interest rates by three quarters of a percentage point, the largest increase since 1994 and third rate hike this year.

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The Fed just announced its largest rate hike in nearly 30 years, ramping up efforts to push back on runaway inflation. 

For borrowers, that means the cost of buying a home or carrying a balance on a credit card will soon get even more expensive. But there’s a silver lining for savers: higher federal interest rates can lead to more interest earned on your savings balance. 

The Federal Open Market Committee this week increased its target range for the federal funds rate from 0.75-1% to 1.5-1.75%. That’s three quarters of a percent jump from the rate set in May, and the largest single increase since 1994. 

It’s also the third interest rate hike this year. The Fed began raising interest rates in March to offset this year’s record inflation numbers. Previously, interest rates held at near-zero since the start of the pandemic. 

Here’s more about what the Fed’s decision means for your savings interest rate, and how to balance this year’s increasing rates:

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What the Fed’s Interest Rate Hikes Means for Savers

When the Federal Reserve raises its target federal funds rate, banks tend to follow suit.

“It’s not as closely tied as people think,” says  Sophia Bera Daigle, CFP and founder of financial planning firm Gen Y Planning — meaning you’re not likely to see an immediate increase by 0.75% interest on your savings. But in general, rates on deposit accounts like savings accounts, money market accounts, and CDs are expected to increase

“Banks do this to attract more customers who will provide more cash flow for banks to leverage,” says Delyanne Barros, money expert and founder of Delyanne the Money Coach.

Still, while it’s likely many banks will raise rates, you can expect some banks to increase APYs faster and by a greater amount than others. For example, large, national brick-and-mortar banks with traditional savings accounts may only increase their interest rates minimally, if at all. Many of these banks simply aren’t in a big rush to raise APYs right now, Barros says. 

“This is why it’s important to shop around for a high yield savings account and not necessarily use the one offered at the bank where you keep your checking,” Bera Daigle says. 

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How Much Will Savings Interest Rates Increase?

The largest rate increases are more likely to appear from online banks that offer high yield savings accounts. The best rates among these accounts already offer more than 10x the national average interest rate, and have historically been the first to raise their APYs after the Fed increases its target range. 

Today the best high-yield savings interest rates range from 0.70% to upwards of 1% APY. 

“Before the pandemic, some online banks were paying 2% to 3% in interest,” Barros says. “It’s hard to say if we’ll see those numbers again this year, but it’s possible they may return eventually if the Fed continues to raise interest rates and inflation isn’t tempered. Banks may also be motivated to raise interest rates since they are also competing with I Bonds this year, which have attracted many savers.”

Why Now Is a Good Time to Save

In its release Wednesday, the Fed cited “elevated” inflation exacerbated by the war in Ukraine, COVID-related lockdowns in China, and other supply chain and price pressures and the major factor in its decision. That’s following ongoing talk among experts about a bear market for stocks and potential looming recession.

As inflation continues to hit record highs and Americans take on higher debt balances, it’s a great time to begin shoring up your emergency fund or revisiting the amount you have saved.

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In general, experts recommend keeping at least three to six months worth of expenses in an emergency fund in an accessible high yield savings account. Only you can determine the amount you’re most comfortable with though, based on your monthly expenses, how secure your income is, any dependents you may have, and other individual factors.

Pro Tip

“It’s always a good idea to have an emergency fund saved regardless of what’s going on in the economy,” Barros says. She recommends three to six months as a general goal, but says it can be wise to bump that up to nine months if you’re at higher risk of losing income in a recession. “Remember that this is to cover your most necessary expenses, not every expense you currently have, so take the time to decide what those are and set a savings goal.”

But after you’ve saved your emergency fund, don’t let fear lead to you hoard all your extra cash in your bank account. 

Even in times of uncertainty, it’s a good idea to continue investing for long-term goals like retirement in a diversified investment portfolio. If you have cash on hand and a secure emergency fund, Bera Daigle recommends setting up automatic contributions to a brokerage account and maxing out your IRA or Roth IRA.

“Once the emergency fund is saved, then I highly recommend continuing to invest even during a bear market,” Barros agrees. “The best thing to do is to dollar cost average and be patient. The best way to balance saving and investing is by setting up automatic transfers to your accounts so you can remove any emotions like fear or anxiety out of these decisions.” 

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