How Inflation Affects Mortgage Rates

If you keep up with news pertaining to the housing market, you may come across information about a recent decision made by the Federal Reserve (the Fed). However, you might wonder how this decision will impact your plans to purchase a home. Here's what you need to be aware of.

The Federal Reserve is actively working to decrease inflation, but despite a year of decreasing inflation rates (as shown in the graph below), the latest data indicates that inflation is still above the Fed's goal of 2%.

Although you may have wished for the Federal Reserve to halt their interest rate hikes due to their success in reducing inflation, they are cautious about stopping too soon and potentially causing inflation to rise again. Thus, the Fed chose to raise the Federal Funds Rate once more last week. According to Jerome Powell, the Fed's Chairperson:

“We remain committed to bringing inflation back to our 2 percent goal and to keeping longer-term inflation expectations well anchored.”

According to Bankrate's Senior VP and Chief Financial Analyst, Greg McBride, the recent decision made by the Fed is influenced by the impact of high inflation and a robust economy.

“Inflation remains stubbornly high. The economy has been remarkably resilient, the labor market is still robust, but that may be contributing to the stubbornly high inflation. So, Fed has to pump the brakes a bit more.”

Even though a Federal Fund Rate hike by the Fed doesn’t directly dictate what happens with mortgage rates, it does have an impact. As a recent article from Fortune says:

“The federal funds rate is an interest rate that banks charge other banks when they lend one another money . . . When inflation is running high, the Fed will increase rates to increase the cost of borrowing and slow down the economy. When it’s too low, they’ll lower rates to stimulate the economy and get things moving again.”

How All of This Affects You 

Put simply, high inflation results in high mortgage rates. However, if the Fed is successful in reducing inflation, it could lead to lower mortgage rates, thereby making it more feasible for you to purchase a home.

This graph helps illustrate that point by showing that when inflation decreases, mortgage rates typically go down, too (see graph below): 

Based on the data presented above, it is evident that inflation, as indicated by the blue trend line, is steadily decreasing. According to historical patterns, it is highly probable that mortgage rates, represented by the green trend line, will also decrease. McBride provides insight on the future of mortgage rates.

“With the backdrop of easing inflation pressures, we should see more consistent declines in mortgage rates as the year progresses, particularly if the economy and labor market slow noticeably.”

Bottom Line

The fluctuation of mortgage rates is dependent on inflation levels. If inflation decreases, it is likely that mortgage rates will also decrease. Would you like to discuss the current housing market situation and receive professional guidance on what it means for you?.