Unveiling the Influence of Inflation on Mortgage Rates: What You Need to Know

When scanning news about the housing market, you might come across discussions regarding decisions made by the Federal Reserve (the Fed). But what do these decisions mean for you, especially if you're considering purchasing a home? Let's delve into the implications.

The Fed is steadfastly focused on taming inflation. Despite witnessing twelve consecutive months of moderation in inflation (as depicted in the graph below), recent data indicates that it still exceeds the Fed's target of 2%:

While you might have anticipated the Fed to halt its rate increases as it progresses toward curbing inflation, they tread cautiously to prevent premature action that could inadvertently rekindle inflation. Consequently, the Fed chose to raise the Federal Funds Rate once again last week, as elucidated by Jerome Powell, the Chairman of the Fed:

"Our commitment remains centered on restoring inflation to our 2 percent objective and sustaining longer-term inflation expectations at a steady level." Greg McBride, Senior VP and Chief Financial Analyst at Bankrate, articulates the interplay between elevated inflation and a robust economy in the Fed's recent stance:

"Inflation remains persistently elevated. The economy's resilience is noteworthy, and the job market remains vigorous, but these factors might be contributing to the elevated inflation. Consequently, the Fed finds itself compelled to apply some brakes."

Although a Fed-driven hike in the Federal Funds Rate doesn't directly prescribe mortgage rate movements, it does wield an influence. Fortune's recent article outlines the dynamics succinctly:

"The federal funds rate serves as the interest rate at which banks lend to one another... In a climate of elevated inflation, the Fed elevates rates to elevate the cost of borrowing, which in turn decelerates the economy. Conversely, in periods of low inflation, the Fed trims rates to stimulate economic activity."

Implications for You

In essence, when inflation escalates, mortgage rates follow suit. However, if the Fed's endeavors to quell inflation prove successful, this could ultimately lead to a decrease in mortgage rates, rendering homeownership more accessible.

This point is accentuated by the graph below, demonstrating that when inflation recedes, mortgage rates generally decline as well:

As indicated by the aforementioned data, inflation (depicted by the blue trend line) is gradually receding, and historical patterns suggest that mortgage rates (represented by the green trend line) are likely to mirror this trend. McBride offers insight into the trajectory of mortgage rates:

"Against a backdrop of diminishing inflation pressures, we can expect more consistent declines in mortgage rates as the year progresses, particularly if economic growth and labor market momentum witness a noticeable deceleration."

In Conclusion

The trajectory of mortgage rates is intricately linked to inflation. As inflation eases, mortgage rates are poised to follow suit. Reach out for a conversation, and gain expert guidance on navigating shifts in the housing market and their implications for your unique situation.