If the Federal Reserve hikes rates it could lead to lower long-term rates … wait, what? Higher interest rates could push long-term rates, like mortgages, lower?
Yes, you read that correctly. The Fed has announced bond tapering at the early month Fed meeting and wants to wrap up their pandemic-induced bond-buying by mid-2022. Once the Fed wraps up tapering, then they can proceed with possibly hiking rates.
Remember, when the Fed hikes rates, they are hiking the Fed Funds Rate, which is an overnight rate banks use to lend to one another. This rate affects short-term loans like credit cards, home equity lines of credit and auto loans. A rate hike or rate cut by the Fed has no direct effect on long-term rates like mortgages, but it could help to keep mortgage rates relatively low – here’s why?
The chance of a Fed rate hike in June 2022 is now at 60% up from just 20% one month ago. Persistently higher inflation is the reason why the probability of a rate hike is moving higher.
So, the Fed is going to hike rates, likely sooner than recently believed, because inflation remains stubbornly high. The rate hike is designed to tamp down inflation and prevent it from getting out of hand.
Did you know that lower inflation is favored by the bond market? Yes, for long-term bonds like Mortgage-Backed-Securities (MBS), high inflation is the arch-enemy. If inflation moves higher, so do long-term rates. The opposite is true.
Bottom line: Home borrowing costs are still just above historic lows. If you are considering a home purchase or refinance, now is the time to jump into the American dream of homeownership.
Source: Mortgage Market Guide
We are ready to help you find the best possible mortgage solution for your situation. Contact Sheila Siegel at Synergy Financial Group today.
