What Fed’s Pause on Rate Hikes Means for Home Buyers

Several economic indicators are showing improvement, but the Fed warns that two more rate increases are likely this year. That has some economists concerned.

Ending a cycle of 10 consecutive rate hikes, the Federal Reserve voted this week to hold off on another increase to its key short-term interest rate. The news fueled hopes that borrowing costs for home buyers could cool in the coming weeks, but only if the Fed continues to pause rate hikes. Mortgage rates are not directly tied to the Fed’s benchmark rate but are often influenced by it.

The Fed’s decision at its latest meeting came on the heels of an improved inflation rate, which was at a 4% annually in May. While that’s its lowest level in two years, it's still far from the Fed’s 2% target. “It also marks the first month in two years that wage growth outpaced consumer price inflation, improving the average standard of living,” says National Association of REALTORS® Chief Economist Lawrence Yun, who added that “further deceleration” in inflation appears likely in the coming months.

However, the Fed on Wednesday signaled that two more increases to its benchmark rate are likely this year as it continues to manage the inflation rate. Yun says further Fed hikes are unwarranted; in fact, the Fed may need to start lowering its rate soon. “A monetary policy lag time exists between decision and inflation,” Yun says. “The rate hikes from earlier months have yet to exert their force at a time when inflation has already decelerated to 4%. There is no need to consider raising interest rates. In fact, considering the balance sheet difficulties faced by community banks and the weakness in the commercial real estate sector, the Fed should look at cutting interest rates before the end of the year. The Fed should look forward, not backward.”

How Mortgage Rates Could Respond

Mortgage rates are more closely tied to the 10-year Treasury bond, which responded this week to better inflation news with a rate decline to 3.7%. “That normally means the 30-year mortgage rate is around 5.5% to 5.7%,” Yun says. “Of course, we know mortgage rates have been near 7% recently, but the potential for a decline is real as we progress through the year.”

Freddie Mac reported that the 30-year fixed-rate mortgage averaged 6.71% last week, up from 5.23% a year earlier and an even further spread from the 3% averages in early 2022. The higher rates have added considerably to home buyers’ costs.

The Fed’s latest decision to hold off on a rate increase in June “will ensure that mortgage rates are likely to keep moving sideways for the next couple of months,” says George Ratiu, chief economist at Keeping Current Matters. “While the Fed’s short-term rate does not directly impact long-term mortgage rates, higher borrowing costs have been trickling throughout the financial system. The 30-year fixed mortgage rate has hovered in the 6% to 7% range since mid-November 2022, cresting the upper limit several times over the past few weeks. The spread between the 10-year Treasury and the 30-year fixed mortgage rate remains about 300 basis points.”

The economy remains on solid footing: “Employment continues rising, and consumer spending has been resilient even with higher borrowing costs,” Ratiu says. “The big question for the central bank centers on consumers’ ability to manage high interest rates considering record-high debt levels.”