Jerome Powell, Chairman of the Federal Reserve, announced that it would be raising the target federal funds rate by a quarter point, much to the chagrin of many. This increase in the Fed’s interest rates will reverberate throughout the rest of the economy, and is likely to result in further increases in interest rates for mortgages in particular. This is meant to help combat inflation, which remains above target levels.
An Expected, But Unpleasant, Increase in Interest Rates
The Federal Reserve, also known as the Fed, increased its target federal funds rate by .25%, from 5.25% to 5.5%. This is the highest that this interest rate has been since 2001, marking more than 20 years since it has risen that high. This was spurred as a result of ongoing inflation, which remains above the Fed’s target rate of 2% per year.
Why the Increase is Important
The Federal Reserve’s interest rate is important because it helps to determine the interest rates of other types of loans throughout the economy. It effectively sets the baseline rate at which banks lend money to each other, which in turn dictates how high they will set the interest rates for lending to others. This naturally includes the mortgage interest rate for those looking to purchase real estate.
An Ongoing Attempt to Combat Inflation
The reason for this increase is a continued attempt to combat inflation, which reached a high of approximately 9% at its peak. While this has continued to fall and is currently at close to 3%, this is still above the Fed’s target inflation rate of 2%. As a result, they are looking to continue to use high interest rates to suppress inflation, with borrowers suffering the consequences of this policy.
The Impact on the Housing Market
This increase in interest rates will make things harder for prospective buyers who may be looking to take out a mortgage to buy a home. Sellers, in turn, may struggle to find buyers able to handle the higher interest rate necessary to take out a mortgage on their home. People looking to refinance their existing mortgages will also suffer, since they will likely need to borrow at a higher rate than they got their original mortgage for if they want to refinance.
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