The Chair of the Federal Reserve, Jerome Powel, announced that it would be raising interest rates by half a percentage point in its meeting on December 14. This constitutes the seventh rate hike that the Federal Reserve (also known as the Fed) has implemented this year, a stark reversal to years past where interest rates have been deliberately kept low. The result of these higher interest rates is that borrowers will be left with more expensive loans, potentially discouraging them from taking out mortgages and having a cooling effect on the housing market.
What is the Federal Reserve Interest Rate?
The Federal Reserve interest rate, also known as the federal funds rate, is the interest rate that banks use when they lend money to each other. This, in turn, impacts the rate at which banks lend money to borrowers, including prospective homeowners. As a general rule, the higher the Fed’s interest rate goes, the higher banks will charge for mortgages and other loans, effectively driving up the price of mortgage and loan payments.
Why is the Fed Increasing the Interest Rate?
The Fed is increasing the interest rate as a way of trying to combat inflation. This year, the rate of inflation reached nearly nine percent, driving up prices across almost every industry. The goal of raising interest rates is to make it more “expensive” to borrow money, which can help to limit the rate of inflation and keep it under control.
Why Does the Fed’s Interest Rate Hike Matter?
The interest rate hike matters for several reasons, both in the short and long term. In the short term, it indicates that the Fed still believes that inflation is a serious problem they need to combat, and that driving up the interest rate will help to limit that high inflation. In the longer term, it indicates that the issues plaguing the housing market are unlikely to go away soon, as rising mortgage interest rates may chase off prospective homeowners looking to purchase a new house.
How Could This Affect You?
If you are looking to buy real estate, this increase in the interest rate is unwelcome news, as it means it will become even more expensive to take out a mortgage in the near future. Sellers, likewise, are not eager to see this interest rate hike, because it means it could become even harder in the future to find a buyer for their property. So long as inflation remains a serious issue for the economy, it is unlikely that this situation will end anytime soon.
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