2024 Fed rate guide

The Federal Reserve (Fed) has two goals as part of its legal mandate: stable prices and setting the conditions for maximum employment. When officials feel that prices are rising too fast, they move to raise interest rates, which stabilizes prices but can work in opposition to employment goals. We’ll talk about the impact of a Fed rate hike, including how it affects mortgage rates.

2024 Fed rate predictions

Predictions are like lottery balls. There are lots of choices and opinions on what’s coming, but it can be very hard to pick the right ones.

The Federal Open Market Committee (FOMC) does have an advantage here. Every 3 months it puts out projections of where it thinks the federal funds rate will be, and people pay attention because committee members determine the direction of interest rates.

The Federal Reserve recently lowered the target range for the federal funds rate by 50 basis points, 0.5% to a range of 4.75% – 5%. The pace implied in the projections might mean a couple of more 0.25% rate cuts to end 2024. But the market was pricing in a bigger cut for a minute. No one knows for sure because officials could change their mind based on new data.

Officials themselves may not agree on the size or number of rate cuts. San Francisco Federal Reserve Bank President Mary Daly has made comments suggesting that economic policy is very tight and there might be more room to lower rates. Meanwhile, her colleague Minneapolis Fed President Neel Kashkari said he would need to see more significant weakness in the labor market to do anything more than modest cuts.

While the current debate is more about how low rates need to be to achieve a more neutral interest rate policy stance, these things go in cycles. By understanding the reasoning and effects of a Fed rate hike, you can be better prepared in the future.

What is a Fed rate hike?

A Fed rate hike happens when the Federal Reserve increases the federal funds rate, thereby increasing how much it costs for banks to borrow and lend money. A rate hike affects interest rates on short- and long-term loans like mortgages. Shorter-term variable rates for things like credit cards are most immediately affected, but all rates tend to move up in a rate hike.

The idea behind the Fed putting its thumb on the scale to the high side with interest rates is that pushing the cost of borrowing up makes people hold onto the money that they have rather than spending it. This has a tendency to push prices down as producers see drops in demand.

How does the Fed raise and lower interest rates?

When people refer to the Fed raising interest rates, they’re referring to the federal funds rate. This is the rate at which federally insured banks borrow from each other overnight to maintain their operations. The FOMC actually sets a target range, and the cost to borrow funds is negotiated between individual banks within these bounds.

Mechanically, it should be noted that the Fed doesn’t just say this will be the range and it becomes so. Depending on the direction they’d like to see rates go, officials will direct the trading desk at the Federal Reserve Bank of New York to buy or sell securities so that the interest rate for borrowing is tied to the amount of funding that the Fed has in reserve.

In this way, interest rates are tied to a traditional supply-demand economic curve. The cost of borrowing by banks is tied to the amount the Fed injects into or pulls out of markets.

How does the Fed rate affect buyers?

Mortgage rates are determined in part by interactions in the bond market and in part by your personal financial and credit qualifications. You’ll notice I didn’t talk about the federal funds rate, but rates tend to follow the same general direction as the federal funds rate because an increase or decrease in the fed funds rate changes expectations for investment returns.

Mortgage rates are based on the yields for mortgage-backed securities (MBS). If interest rates are up across the economy, investors are going to expect a higher return for MBS. If interest rates are dropping, the yield demanded won’t be as high and mortgage rates fall.

It is worth pointing out that the mortgage market tries to get ahead of the Fed because mortgages are packaged into MBS for sale to investors as long as a couple of months after you close. So the rate that you get if you lock today is based on the rate your mortgage company thinks they could get investors to purchase up to 60 days after your anticipated closing date.

This means that whether rates are going up or down, they’ll probably do so well in advance of the announcement. The only time you’ll get a wild swing on Fed rate decision day is if there’s something they say or do that the market doesn’t expect. Because projections are released and officials now do a variety of speaking engagements, this is increasingly rare.

At the most basic level, higher rates decreased buying power. If you have the same monthly budget, higher rates mean higher monthly payments which means your budget doesn’t go as far. But the opposite could be said about lower rates.

Higher rates may make you recalibrate your budget, but it could also mean getting the house you had your eye on more easily because rising interest rates pushed others out of the market.

There’s also the possibility that sellers lower prices to account for tighter budgets, but this often takes longer as sellers are reluctant to move off their price points if they perceive neighbors got a higher number a month ago.

How does the Fed rate affect sellers?

If you’re a seller, you may decide it’s a good time to sell or not based on the direction that interest rates are going. In an ideal world, you always want to sell when rates are low.

There are more potential buyers in the market, leading to a greater chance of being the beneficiary of a bidding war over your home. Also, generally speaking, more buying power can mean higher home values because people are willing to spend more for the asset if borrowing costs are cheaper.

Sometimes you can’t wait to sell. Maybe you have to move due to a job change or because your home no longer makes sense for your current living situation. In this case, the best thing to do is work to price your home as fairly as possible.

If you’re in that Goldilocks zone, buyers may see value and bidding wars could still start. On the other hand, maybe someone is willing to pay a higher price, but you might get one offer instead of having four to choose from.

Fed rate hikes In 2023

The last time the Fed raised the federal funds rate was in 2023. Last year, they raised interest rates four times in equal increments of 0.25% so that the federal funds rate ended up between 5.25% – 5.5% in late July. This capped 11 straight increases between 2022 – 2023 as the Federal Reserve continually pushed up rates that had started near 0% to tame inflation.

2022 – 2023 Fed interest rate hikes at a glance

The bottom line

We’re currently in a cycle of falling rates as opposed to rising ones, but understanding what’s happened in the past can help you react appropriately in the future. If history doesn’t repeat itself, it at least rhymes. A higher federal funds rate will be back at some point and when it does return, higher mortgage rates will come with it.

If you feel good about where things are and want to take advantage of the current rate environment, you can start today with Rocket Mortgage^®.