The Fed Rate Rise May Not Have an Impact on Mortgage Rates

On Wednesday, the Federal Reserve increased its key interest rate by one quarter of a percent. This is the same amount of an increase that it made seven weeks ago. Although it might not seem like a dramatic move, after a rough few weeks for the global economic system, the 25-basis point increase is quite significant.

Early March’s economic data suggested that a higher rate hike was warranted at this month’s meeting. Fed Chair Jerome Powell admitted that the long road to lower inflation might be bumpy. The economy was hit with some major bumps days later when two bank failures caused chaos on the markets. The Fed had to adjust to the chaos, and there was a rush to buy bonds. This could have a negative impact on mortgage interest rates, while the Fed raises rates to combat inflation.

After a 25-basis point increase at the January/February meeting it appeared likely that the Fed would raise interest rates more strongly at the beginning this month. Economic data continued to show a strong economy and a low rate of inflation. Inflation was at 6% in February’s consumer price index.

Powell addressed Congress on March 7th and 8th, emphasizing the Fed’s data-driven decision-making. This seems to have laid the foundation for bigger rate increases.

Powell noted that “if the whole of the data indicated that tightening is justified, we would be willing to accelerate the pace of rate increases.” This was taken by the markets as an indication that a 50-basis point increase could be the result of the March meeting.

The U.S. suffered its second-largest bank collapse in history when a number of depositors tried to withdraw their funds. Silicon Valley Bank collapsed on March 10. (Disclosure: NerdWallet had previously banked at SVB prior to its closing. Within 48 hours, the third largest bank failure was recorded, with regulators taking control of Signature Bank, and SVB. Markets were in turmoil as regulators took control of Signature Bank and SVB, amidst fears of a larger-scale banking crisis.

The Fed’s path forward became less clear, especially since rate hikes played a part in the collapse of Silicon Valley Bank. The liquidity crisis at SVB resulted from panicking depositors after the announcement that the bank was selling bonds at a loss. SVB lost money on these longer-term bonds due to higher interest rates making those assets, which were purchased at significantly lower interest rates — less valuable.

Dean Baker, senior economist at the Center for Economic and Policy Research said last week that the collapse of two large banks has highlighted the problems in the banking sector. He also stated in an email that the Fed could move too aggressively moving forward. Although it appears that panic has been contained by the Fed’s and Treasury’s actions, there is no doubt the Fed’s rapid rate increases over the past year have increased the risks to the financial sector. ”

In 2023, mortgage rates were on an upward trend, with APRs (annual percentage rates) on 30-year fixed rate loans hovering in the 7% range right at the time Powell spoke to Congress. However, as banks failed, mortgage rates plummeted.

Because of this, investors who were worried began to look at government bonds for their relative safety. Bonds seem like a safe way to store assets in times of economic uncertainty and high interest rates. This is causing bond prices to rise, which in turn tends lower fixed mortgage rates.

Mortgage rates may plateau as the Fed appears to be reducing today’s rate hike. They could fall if investors are anxious enough to keep buying bonds. This is something that mortgage lenders might be willing to do, since interest rates are increasing and pushing potential buyers from the housing market.