Jerome Powell, the Chair of the Federal Reserve — the institution responsible for setting overnight lending rates in an effort to maintain low and stable inflation. However, inflation has been volatile lately, prompting the Fed to hike overnight rates at the fastest pace in four decades.
While mortgage rates have also surged at a similar pace, they are not directly controlled by the Fed. Instead, the Fed’s influence on overnight rates spills over to the rest of the rate market. Generally, the longer the borrowing term, the less connected the interest rate may be to the Fed Funds Rate.
Moreover, market expectations for the Fed Funds Rate are constantly adjusted, while the Fed only officially hikes or cuts rates eight times per year. The Fed is set to meet again in two weeks, and the only question on everyone’s mind is how much rates will be raised by.
Initially, markets were expecting a 0.25% hike, which is viewed as the minimum increment for a rate change from the Fed. However, recent data has shown significant economic resilience and persistent inflationary pressures, prompting some to call for a 0.50% hike.
In his scheduled testimony before the Senate Banking Committee, Fed Chair Powell refrained from specifying the exact amount of the next rate hike, but did express the need for a faster and more substantial increase than previously expected. As a result, markets have increased the odds of a bigger hike in two weeks, as well as a higher ceiling expected by the end of 2023.
It’s worth noting that the Fed Funds Rate does not directly influence mortgage rates. However, as market expectations shifted in the direction of “higher for longer,” there was some spillover that caused the average mortgage lender’s rates to climb to the low 7s for a top-tier conventional conforming 30-year fixed scenario.
As Powell emphasized to senators, the Fed will base its decisions on data, and there’s important data yet to come before the next Fed day. This presents a double-edged sword as stronger data could send rates even higher just as easily as weaker data could help bring them back below 7%.