Fed Plans Rate Hikes to Manage Inflation

Two house miniatures each upon a stack of coins, one taller than the other with a line graph behind them indicating rising rates

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The Federal Reserve said on Wednesday that it plans to have multiple rate increases in 2022 and will taper its monthly asset purchases at a quicker, much more aggressive pace than analysts originally anticipated. What could this mean for mortgage rates?

CNBC reports “the days of rock-bottom rates are nearly over.”

The Fed’s benchmark short-term interest rate does not directly influence mortgage rates but it does often influence them. The Fed expects the central bank’s benchmark interest rate to increase to 0.9% in 2022, up from a prediction of 0.3% in September.

“For consumers, the writing is on the wall that interest rates are likely to start climbing in 2022,” Greg McBride, chief financial analyst at Bankrate.com, told CNBC. That likely includes long-term mortgage rates, since they are influenced by economic conditions and inflation.

The Fed said it’s moving more briskly to try to manage inflation. “We are prepared to use our tools to make sure high inflation doesn't get entrenched,” Fed Chair Jerome Powell said in a video news conference. “This is a strong economy, one in which it's appropriate for interest rate hikes.”

Last month, consumer prices moved higher, reaching 6.8% annually in November, prompting increased concerns over inflation.

In the housing market, mortgage rates are being closely watched since they have a big impact on home shoppers’ purchase power. The average 30-year fixed-rate mortgage has already increased to 3.24%, and LendingTree analysts now expect rates to climb near 4% by the end of 2022. National Association of REALTORS® Chief Economist Lawrence Yun has predicted that mortgage rates will average 3.5% in 2022, although that prediction was made before the Fed’s actions Wednesday.

But home shoppers shouldn’t panic: Rising mortgage rates—even approaching 4%—will still remain near historical lows, analysts say. Also, higher rates could slow the housing market somewhat, which wouldn’t necessarily be a bad thing, Jacob Channel, senior economic analyst at LendingTree, told CNBC. “Higher rates are likely to decrease demand for new housing; would-be home buyers might find themselves with a greater selection of homes to choose from in 2022,” Channel says.