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Rate Hikes Loom as Fed Announces Increases in March

January 27, 2022

In an effort to tame inflation, the Federal Reserve announced it soon will need to raise its benchmark interest rate—the first time in more than three years. That likely will put pressure on mortgage rates, and even though the Fed’s benchmark rate doesn’t directly affect home borrowing rates, they do often have an impact.

The Fed hinted on Wednesday that a quarter-percentage-point increase is soon coming to its benchmark short-term borrowing rate. This would be the first increase since December 2018.

“With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the Federal Open Markets Committee said in a statement on Wednesday. The FOMC also is to end its bond-buying program in March. The central bank outlined ways to start “significantly reducing” bond holdings on its balance sheet on Wednesday.

“I think there’s quite a bit of room to raise interest rates without threatening the labor market,” Fed Chairman Jerome Powell said in a news conference.

The federal funds rate is the interest rate that banks borrow and lend to one another. The Fed’s action will likely affect borrowing and saving rates.

Already, long-term fixed-rate mortgage rates have been rising. The average 30-year fixed-rate mortgage has climbed by about 50 basis points in the first weeks of the year. Last week, rates averaged 3.56%, up from 2.77% a year ago, Freddie Mac reports.

Economists have increased their forecasts recently for the mortgages, and the National Association of REALTORS® predicts rates to climb to 3.9% by the fourth quarter. Similarly, the Mortgage Bankers Association now predicts mortgage rates to increase to 4% by the end of the year.

While those forecasts are substantially higher than last year’s below-3% rates, economists note that rates are still low by historical standards.