Key Takeaways
- The Federal Reserve Wednesday announced its fifth rate hold in a row, after hikes in 2022 and 2023 raised the federal funds rates to almost a 23-year high.
- The Fed's rate moves do not directly drive mortgage rates. But they can trigger dominoes that impact the rates lenders are willing to offer.
- Inflation is one of the biggest drivers of mortgage rates, and it remains stubbornly above the Fed's 2% target level.
- Mortgage rates surged to a 20-year high in October, but have since dropped more than a percentage point.
- The Fed said Wednesday it's still watching and waiting for more good news on inflation and jobs before considering a rate cut. But it is forecasting three rate decreases by the end of 2024.
The Many Factors That Impact Mortgage Rates
When the Federal Reserve raises its federal funds rate—as it did aggressively during 2022 and 2023—it's commonly thought that this drives mortgage rates higher. And conversely, when the Fed lowers rates, mortgage rates will fall. So does another rate hold by the Fed, announced Wednesday, mean mortgage rates will march in place?
The actual relationship between the Fed and the rates that mortgage lenders are offering is not quite so clear. Instead, moves by the central bank more directly impact short-term rates, like deposit rates at the bank, credit card interest rates, and personal loan rates.
But fixed mortgages offer a long-term rate, and that makes a linkage to the Fed's moves a bit more tenuous. And in fact, mortgage rates and the federal funds rate can—and sometimes do—move in opposite directions.
Beyond the Fed's benchmark rate, the mortgage lending market is affected by a complex mix of many economic factors. These include inflation, consumer demand, housing supply, the strength of the current economy, and the status of the bond market, especially 10-year Treasury yields.
But given the historic speed and magnitude of the Fed's 2022–2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate helped push mortgage rates up by an equally historic amount over the last two years.
The Fed Is Holding Steady, But Mortgage Rates Have Come Down
In the mortgage history books, 2023 will go down as an especially painful year for homebuyers. Granted, 2022 saw 30-year mortgage rates rise faster: After sinking to historic lows in the 2–3% range in 2021, the next year saw 30-year rates shoot above 7%. The pace of 2022 increases was startling.
But 2023 showed that mortgage rates still had more room to run. Though the 30-year average wavered in 6% territory for most of the first half of 2023, by October it had catapulted to an astonishing 8.45%—its highest mark in almost 23 years.
Today, mortgage rates are still historically elevated. But they've dropped considerably since October, even dipping into 6% territory five times since Christmas. The current average is a bit higher than that, but still more than a full percentage point below the 8.45% peak of last fall.
But why is this happening after the Fed has held rates steady for five consecutive meetings? The federal funds rate was raised to 5.25% in July 2023 and remains there. Yet mortgage rates have been dropping.
A primary reason centers on inflation. In June 2022, inflation hit a 40-year high of 9.1%. But the Fed's rate-hike campaign had inflation directly in its crosshairs, and it has successfully lowered inflation to 3.2% so far, as of the February reading. So while the Fed has not yet decided to start lowering rates, the inflation-fighting work it's already accomplished has put downward pressure on mortgage rates.
Still, many expect elevated mortgage rates to be with us for a long while. According to Sam Khater, Freddie Mac's chief economist: “Despite the recent dip, mortgage rates remain high as the market contends with the pressure of sticky inflation. In this environment, there is a good possibility that rates will stay higher for a longer period of time.”
What 2024 Fed Moves Could Mean for Mortgages
Wednesday's Fed decision to hold its benchmark rate steady was no surprise. It had been overwhelmingly expected for weeks that the central bank would continue to maintain the federal funds rate at its current level. In fact, a majority of federal funds traders are betting the first rate cut won't arrive until June, according to the CME Group's FedWatch Tool.
But what was eagerly awaited Wednesday was the Fed's quarterly "dot plot." The dot plot is a graph that shows, with one unnamed dot per committee member, where each central banker predicts the federal funds rate will be at the end of 2024, 2025, and 2026.
The dot plot released Wednesday shows a median forecast of three rate decreases by the end of this calendar year, with almost half of the 19 committee members penciling in that prediction. If that comes to fruition, it would reduce the federal funds rate by 0.75 percentage points by year's end.
This is similar, though slightly more conservative, than the forecast Fed members made in December. At that time, the dot plot also showed a median guess of three rate cuts, but with more than a quarter of committee members projecting four or more rate decreases. In contrast, Wednesday's dot plot showed only a single central banker (5% of the committee) predicting anything more than three rate cuts.
Looking further out, the dot plot suggests further rate reductions of about 0.75 percentage points each in 2025 and 2026. Of course, these are just the committee members' best guesses based on the data they have now. As always, they'll make each rate decision one by one in light of the freshest economic readings. But once the Fed appears ready to make a first rate cut, that will signal it believes inflation has stabilized.
The expected decreasing inflationary pressure, plus the added impact of a falling federal funds rate in 2024, is likely to push mortgage rates lower. But while the Fed raised its benchmark rate fast in 2022–2023, it's expected to bring rates down at a much more gradual pace in 2024 and beyond. As a result, any mortgage rate improvements are also expected to be gradual.
Compare the Best Mortgage Rates Today - May 21, 2024
How We Track the Best Mortgage Rates
To assess mortgage rates, we first needed to create a credit profile. This profile included a credit score ranging from 700 to 760 with a property loan-to-value ratio (LTV) of 80%. With this profile, we averaged the lowest rates offered by more than 200 of the nation’s top lenders. These rates represent what real consumers will see when shopping for a mortgage.
The same credit profile was used for the best state rates map. We then found the lowest rate currently offered by a surveyed lender in that state.
Remember that mortgage rates may change daily, and this average rate data is intended for informational purposes only. A person’s personal credit and income profile will be the deciding factors in what loan rates and terms they can get. Loan rates do not include amounts for taxes or insurance premiums, and individual lender terms will apply.
