Key Takeaways:

  • Raising rates by a quarter point is an effort to reel in inflation;
  • Officials expect more rate increases through 2023;
  • The central bank’s outlook for GDP growth dropped to 2.8 percent.

 By Dianne M. Pogoda

 

Short-term mortgage rates are likely to rise in the wake of the Federal Reserve Bank’s move to raise the federal funds rate by 0.25 percent, the first increase since December 2018. It is part of the central bank’s plan to curb inflation. Prices are up 7.9 percent from a year ago, with gasoline prices rising 38 percent in 12 months. Fed officials indicated that they would continue to be aggressive, with additional rate increases possible this year and into 2023.

This is significant for the remodeling industry, as home improvement projects are closely tied to home buying and selling — which, naturally, are affected by mortgage rates and home equity line of credit (HELOC) rates.   

The benchmark federal funds rate had been hovering around zero since early 2020 — the start of the pandemic — and the 25 basis points increase will bring the rate into a range of 0.25 to 0.5 percent. Mortgage rates,  at historic lows around the start of the pandemic, have been rising in recent weeks and the popular 30-year fixed mortgage rate is now averaging about 4.3 percent.

Officials also revised 2022 GDP growth projections to 2.8 percent from the four percent estimated in December, attributing the drop to potential effects of the Ukraine war. The committee still expects the unemployment rate to hold at 3.5 percent through the end of the year.

The federal funds rate is the interest rate that banks and other financial institutions charge each other for overnight loans. It mainly affects credit-card interest rates, HELOCs and adjustable rate mortgages, which move up and down with the market on a monthly basis. Long-term rates for conventional fixed-rate mortgages are generally not affected as quickly by a change in the federal funds rate.

According to Bankrate, fixed-rate mortgages are tied to the 10-year Treasury rate. When that rises or falls, the 30-year fixed rate mortgage tends to do the same. Price inflation also influences fixed mortgage rates — when inflation is low, those mortgage rates also trend lower.

The Fed’s next meeting is slated for May 3-4.