The 0.75 percent spike was more than initially expected, and will impact short-term and adjustable-rate loans quickly. By Dianne M. Pogoda

 

In an expected move, the Federal Reserve Bank on Wednesday raised the federal funds rate in its effort to reel in inflation, which is running at a 40-year high. What was unexpected was the amount of the raise: The central bank upped the rate by 75 basis points (0.75 percent) — the biggest spike in 28 years. 

The hike follows a 0.25 percent raise in March and a 0.50 percent jump in May. Inflation, which has been surging in recent months, has driven consumer prices 8.6 percent higher than they were a year ago. This includes prices for gasoline, groceries, as well as rent and many services.

Economists believe that as interest rates rise, consumer spending will slow, and this will ease the demand on the supply chain — which in turn will bring prices down. In the short term, the rate hike will have a greater impact on loans with adjustable rates, like home equity loans or credit cards. But the spike will also impact mortgage rates, which have been steadily rising and according to Mortgage News Daily, surged to 6.28 percent this week — up from 5.5 percent last week — for a conventional 30-year loan.

Higher mortgage rates mean many potential homebuyers will be priced out of the market, especially since home prices are at historic highs — 20.6 percent higher in April against April 2021. On a month-to-month basis, prices were also up a sharp 2.1 percent from March, also a record. In both March and April this year, prices were at least 20 percent higher, year-over-year. At the same time, home sales have been falling since the beginning of the year, according to the National Association of Realtors.

Mischa Fisher, chief economist for ANGI Inc., said that as mortgage rates rise, house-price appreciation should start to slow. But it also means that people who currently have low mortgages are disincentivized to move to another home and incur a higher mortgage rate, therefore, they are more likely to remodel than to relocate.

Inflation has been hitting retail sales, which fell 0.3 percent in May, as consumers spent more on gas and food, while spending on appliances, furniture and electronics declined.

Fed officials projected the economy will grow just 1.7% this year, down from the 2.8% growth rate they had predicted in March.

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, Home Equity Lines of Credit (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.

More rate hikes are expected through this year and possibly into 2023. The Fed’s next meeting is scheduled for July 26-27.