The U.S. Federal Reserve (Fed) Interest Rate Decision

Every participant in the market for U.S. real estate is impacted by the movement of mortgage rates. Mortgage rates and interest rates for loans and credit across the economy are affected by the announcements of the Federal Reserve (Fed). The Fed interest rate decision impacts the entire housing industry, including home buyers, sellers and those using home equity.

The Federal Reserve is the central bank of the United States. In addition to oversight of the banking system, the primary mission of the Fed is to set the course of monetary policy for the nation. Through controlling the money supply, the idea is to chart a solid economic growth trajectory while also maintaining stable prices and maximizing employment levels.

The lever the Fed can stick its thumb on in terms of monetary policy is the federal funds rate. The target range the Fed sets directly affects how much it costs for federally insured banks to borrow from each other overnight. Banks then negotiate with each other within that range when they need funds.

Although the Fed doesn’t set consumer or commercial interest rates, up or down movements in the Fed funds rate affect borrowing costs across the economy. Increases or decreases in cost for banks tend to be passed through to borrowers.

Lower interest rates tend to spur economic growth because, if borrowing is cheaper, businesses increase investment and consumer spending is higher. However, this also means there’s more money in circulation, which causes the money people are currently saving to be worth less relative to when less money is available.

This can lead to a situation where people will spend more money because they have more money, which incentivizes companies to raise prices. The worry here is inflation. Consumers start spending more now because they expect prices to continue to rise. Higher spending pushes prices up, and it becomes a self-fulfilling prophecy.

If the Fed raises interest rates, inflation tends to come down because people hold onto the money they have – both based on being able to earn a higher interest rate to keep it in the bank and out of concern that they should hold on to what they have because money costs more. The downside of this is that it slows economic growth and can lead to job loss and recession.

We’ve been in an upward cycle with the federal funds rate over the last several years because the Fed has been working to tame pandemic-related inflation, but it’s a delicate balancing act.

Housing and mortgages have been especially hit hard by higher interest rates because the loan amounts for homes are so much higher compared to personal loans or even cars. So going from rates that were in some cases under 3% to rates above 7% is an affordability adjustment.

This has been compounded by the fact that housing supply is very low relative to demand, so home prices aren’t necessarily coming down to match the drop in borrowing power. This makes it even more important to be really cognizant of your budget and affordability going in.

The Fed wants to see lower inflation data. The preferred measure is always the personal consumption expenditures index. This shows how much earned income households are spending on consumer goods and services. Right now, that’s running at 2.8%, excluding food and energy.

The Fed would like to see this get down to 2% over the long run. That’s judged to be enough inflation to get people to buy now and keep the economy going without devaluing existing currency. While it has said that inflation appears to be headed in the right direction, the Fed wants to see data that shows inflation trending downward before moving forward with rate cuts.

That’s if things go according to the Fed’s plan. There are things that might force its hand toward lowering rates sooner than it would want to. For instance, if there was a spike in weekly jobless claims or the monthly unemployment data, that’s a potential sign of recession. The same thing goes for slowdowns in the manufacturing sector or a decrease in job openings.

The Fed is also attuned to global events so it can be ready for a wildcard. Odds are there won’t be a great mosquito invasion of 2024, but officials have been consistent about saying policy will respond to changes in conditions. They’ve been trying to engineer an outcome involving a major reduction in inflation without causing a recession, so it requires constant eyeballs.

In its most recent rate decision, the Federal Open Market Committee (FOMC) chose to leave the target range for the federal funds rate at the current level which was 5.25% – 5.5%. What’s interesting though is that four times a year, the Federal Reserve comes out with their projections for a bunch of economic indicators including the federal funds rate.

The Federal Reserve projections for the federal funds rate call for a median of 4.6% by the end of 2024. Historically, outside of external shocks like the pandemic, when the Federal Reserve chooses to cut the target rate, it does so in increments of 0.25%. That argues for three rate cuts before the end of the year.

As a home buyer, it’s pretty simple – and not so simple at the same time. At a basic level, whatever happens with the federal funds rate eventually filters down to mortgage rates. If the federal funds rate goes up, rates go up. If it goes down, they go down. So that’s a direct tie to affordability.

However, the affordability picture does get complicated because, in theory, as rates go up, prices would come down based on buyers having less available money due to rising interest rates. That’s not actually what’s happening because supply is so limited in many places.

Because of this, the biggest advice finance professionals can give is to be rock solid on what your budget is. Also worry about the payment and not necessarily so much about the rate. You may be able to refinance later if rates fall.

Prices may not necessarily be any lower, but you may have fewer buyers to compete with given affordability challenges. Because of this, if you find a home you like, it could still be an advantage for some buyers.

For sellers, rates matter and they don’t matter. What is meant by that is no matter what rates are, your sale price is going to be dictated by supply and demand in your area. Rates only matter in that there’s a potential for buyers to be able to offer more or less. But it shouldn’t affect your sale price directly.

If you’re trying to determine whether you should sell now, the answer really comes down to your motivations. If you need to sell, now is as good a time as any. On the other hand, if you can wait until rates are lower, more people might jump into the market, and you might sell at a higher price.

If you’re looking to refinance your mortgage loan or otherwise access your home’s value through a home equity loan or home equity line of credit (HELOC), lower is always better. But there’s some value to refinancing even in higher rate markets if you have yet to do so. The reason being that you can get a loan based on your home equity cheaper than other financing.

When the federal funds rate is going up, it’s important to realize that rates for every type of loan are going up. This includes personal loans and credit cards, which already have much higher rates of interest than something tied to your home.

If you don’t want to touch your primary mortgage rate, a home equity loan or HELOC could help you consolidate debt or do a cash-out refinance. A Home Loan Expert can also help you with a blended rate calculation to determine which option makes the most sense in your situation. Rocket Mortgage® doesn’t offer HELOC’s at this time but does offer home equity loans.

The Federal Reserve doesn’t set interest rates other than the target range for the federal funds rate at which banks borrow money. However, there’s a trickle-down effect to all other consumer interest rates within the economy. From any home finance perspective, if the federal funds rate goes up, so do mortgage rates. However, the opposite happens if it goes down.

The Fed has consistently raised rates in recent years to try to bring inflation under control. However, Committee members signaled they want to drop the federal funds rate up to three times this year. Officials are trying to walk a high wire. They want to slow down the economy enough to cool inflation while also making sure that it doesn’t tip into a recession.

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