Fed expects to raise interest rates at a faster pace

Facade on the Federal Reserve Building in Washington DC
Paul Brady Photography / Shutterstock

During a two-day meeting in late September, officials left the Fed's key interest rate, called the federal funds rate, close to zero and kept other COVID-era policies intact.

But the sooner the central bank feels the economy is healthy enough to operate without its assistance, the sooner mortgage rates will rise. And, Fed policymakers see good economic news around the corner:

  • They expect the economy to grow as much as 6.3% this year, and by up to 4.9% in 2022.
  • They project that the unemployment rate will fall to between 3% and 4% next year.
  • They indicate inflation could range up to 4.4% this year before falling back to between 1.7% and 3% in 2022.

The Fed has said that once employment improves and inflation stabilizes around 2%, it will feel comfortable raising the federal funds rate, which dictates the prime rate and variable mortgage rates.

Given the other projections, it shouldn't be any surprise that the Fed now expects to raise rates at a faster clip. Half the members of the Fed's policy panel now believe the federal funds rate will increase in 2022.

Just a few months earlier, Fed officials didn't expect to start bumping up rates again before 2024. Their new projections indicate there could be one rate hike next year, and three more in 2023.

Why mortgage rates will go up

United States Treasury Savings Bonds
larry1235 / Shutterstock

As the Fed raises rates, today's low mortgage rates will be history. Rates on variable-rate home loans are directly impacted by what the Fed does, so they're sure to increase, but rates on fixed-rate mortgages are likely to move up, too.

And here's why: In addition to holding the federal funds rate low, the Fed has been keeping fixed mortgage rates in check by buying $80 billion worth of Treasury bonds and $40 billion in mortgage-backed securities every month for most of the pandemic.

Those purchases, the Fed says, help "foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses."

The Fed hasn't gone so far as to announce when it’ll begin scaling back its spending spree, but policymakers did indicate on Wednesday that the country’s ongoing economic rebound has them considering tapering their purchases.

Corey Burr, senior vice president at TTR Sotheby’s International Realty in Washington, D.C., says if a reduction in the Fed’s bond purchases results in a higher interest rate on the Treasury's 10-year note, that could trigger a corresponding rise in mortgage rates.

What to do before mortgage rates start climbing

Happy young banking worker watching african ethnicity male client signing mortgage application
fizkes / Shutterstock

If the central bank says its federal funds rate could rise next year and its bond-buying program is on the brink of being reduced — moves that will increase mortgage rates — it may be time to lock in a low rate, whether you're a homebuyer or a homeowner considering a cost-saving refinance of an existing mortgage.

Whatever type of home loan you’re shopping for, be sure to compare offers from at least five different lenders. Evaluating multiple offers is a proven strategy for finding the best mortgage for your budget.

Before applying for your loan, take a quick, free peek at your credit score. Borrowers with the highest credit scores are typically offered the lowest rates, so you may need to work on improving your score before you start approaching lenders.

If a mountain of nagging, high-interest debt is making it difficult for you to find an affordable mortgage rate, you may want to roll those debts into a single, lower-interest debt consolidation loan. You’ll pay less in interest, eliminate your debt sooner and free up some much-needed cash flow.

About the Author

Doug Whiteman

Doug Whiteman


Doug Whiteman is the editor-in-chief of MoneyWise. He has been quoted by The Wall Street Journal, USA Today and CNBC.com and has been interviewed on Fox Business, CBS Radio and the syndicated TV show "First Business."

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