Will mortgage rates go up after the Fed meeting this week?

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Borrowers and experts alike have been eyeing this week’s Federal Reserve meeting as a key moment for mortgage rates.

The Fed is expected to announce on Wednesday that it will start “tapering” its Covid-era bond-buying program, which has been keeping mortgage rates low over the last year and a half.

In theory, that means rates should go up. But there’s a catch.

We’ve known about the Fed’s plans for a while now. So the announcement won’t come as a surprise.

And that means — contrary to popular belief — we might not see a big rate spike after the Federal Reserve meeting, if any at all.

Is the Fed going to raise interest rates this week?

In the simplest terms, no. The Federal Reserve does not set mortgage rates, and it does not have the power to raise or lower them at will.

However, the Fed does have two levers with which it can influence mortgage interest rates:

  1. The federal funds rate
  2. The Fed’s bond-buying program

Since the beginning of the pandemic, the Federal Reserve has been buying $40 billion per month in mortgage-backed securities (MBS). MBS are a kind of bond that helps determine mortgage interest rates.

By keeping demand for MBS artificially high, the Fed has forced mortgage rates to stay low during the Covid pandemic.

But now that the economy is on a path to recovery, the Fed has determined it’s time to start pulling back on this stimulus program. This process is known as “tapering” — a word you’ve likely heard if you’ve been following mortgage rates over the past few months.

So there’s a good chance the Fed’s tapering plans have already been priced into today’s mortgage rates. Indeed, average rates have increased substantially over the past few weeks leading up to the Federal Reserve meeting:

Don’t get complacent — higher rates are still coming

What does all this mean if you’re a home buyer or a homeowner looking to refinance?

First, it means you shouldn’t panic about rates skyrocketing after this week’s Federal Reserve meeting. At this point, a huge rate spike like the one borrowers saw in 2013 seems unlikely.

However, now is not the time to get complacent.

Rates are still expected to rise in 2021 and 2022. And there are two big reasons for that:

Inflation — Higher inflation typically leads to higher rates. And the annual U.S. inflation rate was at a 13-year high in September

Economic recovery and growth — As Covid cases continue to decline, and the economy continues to improve, it seems inevitable that rates will go higher. Keep in mid that a stronger economy typically leads to higher interest rates for mortgage borrowers

We might see a slow, steady rate climb rather than a sharp increase. But most experts agree that higher rates are coming sooner or later.

So, if you or your client is in a position to lock a rate soon, it’s a good time to do so.

Just remember if you come into a competitive situation, a bridge loan has the potential to swing the deal in your favor.

Here to help.