How Inflation affects mortgage rates

You may have read in the news about the housing market that the Federal Reserve made a recent decision. How does this decision impact you and your plans to purchase a home? The Fed is working hard to reduce inflation. Even though inflation has been falling for 12 straight months (see graph below), most recent data show that it is still higher than the Fed’s target of 2.0%: You may have hoped the Fed would stop its hikes because they are making progress in their goal of bringing inflation down, but they don’t wish to stop too early and risk inflation rising back up. The Fed decided to raise the Federal Funds rate again last week. Jerome Powell, the Chairman of the Fed, said: “We remain committed to bring inflation back to our 2% goal and to keep longer-term expectations well-anchored.” Greg McBride explains how high prices and a strong economy played into the Fed’s decision. The labor market remains robust and the economy has been resilient. However, this may be contributing to stubbornly high inflation. Fed needs to slow down a little more. According to a recent Fortune article: “The federal funds rate is the interest rate that banks charge each other when they lend money. . . When inflation is high, the Fed will raise rates to increase borrowing costs and slow down the economic growth. If inflation is high, then mortgage rates will be high. This graph illustrates that if the Fed is successful in bringing down the inflation rate, it will likely lead to lower mortgages rates. McBride predicts that mortgage rates will continue to fall as inflation eases. This is especially true if the labor market and economy slow down. Mortgage rates will also fall if inflation slows. You can rely on a trusted real estate professional for expert advice about housing market changes.

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