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The Fed Just Hiked Rates for the First Time in 3 Years. Here's What That Means for Homebuyers

The Federal Reserve just announced its first rate hike in in three years. Here's what that means for homebuyers, in plain English.

March 16, 2022
March 16, 2022
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What homebuyers should know about today’s Federal Open Markets Committee (FOMC) meeting:

  • The Federal Reserve voted 8-1 to raise the federal funds rate to ¼ to ½ percent
  • The increased federal funds rate will put upward pressure on mortgage rates
  • Higher mortgage rates will make homebuying less affordable, but should help to cool the overheating housing market

If you consume any media today, you’ll probably see a few headlines about the Federal Reserve raising interest rates. Many of those articles will be written in some version of English that requires a economics PhD to actually understand.

Allow me to translate.

Who is the Fed and what did they do?

Who is “the Fed?”

The Federal Open Markets Committee (FOMC) is a group that meets about every six weeks to make decisions on behalf of the Federal Reserve. Basically, they’re tasked with steering the American economy.

Lately, with inflation running at a 40-year high and sudden impacts from the Russian invasion of Ukraine, the USS Economy has been a tough ship to steer.

You’ll see the FOMC referred to simply as “The Fed,” “the Central Bank,” and by some abbreviation of chairperson Jerome Powell’s name (Powell, J-Powell, Jerome-eo, etc.).

What did they do?

The Fed announced two big moves today:

  1. It’s raising the federal funds rate for the first time in 6 years
  2. It’s “reducing its holdings” of bonds and securities it purchased during the pandemic

Let’s break them both down.

Raising the federal funds rate

The FOMC voted 8-1 to raise the federal funds rate for the first time in three years. Beginning this month, the rate will be between 0.25% and 0.5%.

The federal funds rate is the cost at which banks and credit unions borrow money from the federal reserve. This rate has been at rock bottom – between 0 and 0.25% – since the onset of the coronavirus pandemic in March 2020. The ultra-low rate made borrowing money cheaper for institutions and consumers, which encouraged spending and stimulated the economy.

Now, with inflation running at 8.1% (well over its target of 2%), the Fed is essentially reversing this policy to try to slow the overheating economy and curb inflation.

Today marks the first of several rate hikes coming in 2022, although “J-Powell” hasn’t said exactly how many are coming and how steep they will be.

It’s important to note that the one member who voted against today’s rate hike did so because he preferred a steeper increase of 0.5 percentage points instead of 0.25.

Reducing its holdings

The Fed also announced that it would begin reducing its holdings of bonds and securities “at a coming meeting.”

In short, the Fed is warning the market that instead of “printing money” like it has been by $120 billion in buying bonds and securities (holdings) each month since March 2020, it’s going to reduce the supply by selling them off.

In the last two years, the Fed has increased the economy's money supply by 27% by purchasing bonds and securities. Like lowering the federal funds rate, this stimulated the economy during the pandemic and staved off a deeper recession.

Now, with inflation running amok, it’s nearly time to pull some of that money back out by selling those holdings.

What does this mean for homebuyers?

OK, the Fed raised the federal funds rate and hinted at reducing the money supply. What does that mean for homebuyers?

In short, it means higher mortgage rates. Both of these policies put upward pressure on mortgage rates, which makes getting a home loan more expensive.

Sounds like terrible news, right?

Well, there’s a silver lining: Higher mortgage rates could reduce homebuying demand and finally slow the unprecedented price growth seen in recent months. And right now, it may be the quickest mechanism for slowing price growth.

Supply and demand are severely out of whack in the housing market. In one corner, a giant wave of millennials aging are into their prime homebuying years. In the other, there’s a severe shortage of homes due to a decade of underbuilding following the 2008 crash.

Neither of these problems have quick fixes. It takes years, if not decades, to replenish housing stock and it takes years to… well… age humans.

For right now, higher mortgage rates are the quickest fix to slow demand and bring the market closer to balance.

Mortgage rate projections are not a reflection of Fairway’s opinion or guarantee of interest rates in the current or upcoming market.

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