What the Fed’s September rate hike means for mortgage rates

Aly J. Yale
Aly J. Yale
The Mortgage Reports Contributor
September 21, 2022 - 3 min read

The third Fed rate hike in a row

The Federal Reserve’s September meeting ended just as it did in June and July — with a 75-point (0.75%) hike in the bank’s benchmark rate.

The move was largely expected, what with inflation running high and previous rate hikes doing little to tamp it down. This month’s increase marks the fifth such one this year.

The jumps have led to a steep run-up in mortgage rates. And while some thought that lenders had already baked this projected increase into their rates (with the 30-year average surpassing 6%), it seems there could still be a further impact on the horizon.

The Fed’s September rate increase

The Fed officially announced its 75-basis point increase at 2 p.m. on Sept. 21, just after concluding its sixth FOMC meeting of the year.

In its post-mortem notes, the Federal Open Market Committee pointed to supply and demand imbalances, the Russia-Ukraine conflict, and rising inflation (currently at 8.3%) as drivers for the latest increase, noting, “The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3.25% and anticipates that ongoing increases in the target range will be appropriate.”

The Committee also confirmed it would continue scaling back its mortgage-backed security holdings, which it increased during the pandemic to bolster demand and keep rates low. Both policy actions were unanimously approved by all FOMC members.

The Federal Reserve and mortgage rates

The Federal Reserve doesn’t set long-term mortgage rates, though its policies do impact banks’ costs to borrow — and, therefore, how they price their products. As a result, Fed rate hikes tend to lead to increases in mortgage rates, too.

The Fed met and increased its benchmark rate in March, May, June, and July of this year. In all those months (save for July), the average rate on 30-year mortgage loans rose, too. Rates in February averaged a mere 3.76 percent. By the end of August, they were well above 5 percent.

Given this knowledge, it’s no surprise that lenders began responding to this month’s expected Fed move even before the September meeting started. When various Fed members — Chairman Jerome Powell and Governor Chris Waller, to be specific — telegraphed their intent to raise the benchmark rate again in various media interviews over the past month, mortgage rates responded in kind. The rate on 30-year loans surpassed 6% in mid-September.

Was that it, or are more increases coming down the pike? There’s no way to say for sure, but it seems the latter may be true. Just days ago, lenders were reporting rates near 6.5% — that’s a 14-year high and a huge jump in just a few weeks’ time.

What the Fed rate hike means for borrowers

Nothing’s set in stone, but it’s a reasonable assumption that mortgage rates could rise further on the back of the Fed’s latest decision. And if the Fed continues increasing its benchmark rate at future meetings (the next ones are in November and December), that could also mean higher rates down the line.

If you’re on the fence about buying a house or refinancing, the time to lock your rate might be right now — before rates can rise further.

Additionally, if you have an adjustable-rate mortgage or home equity line of credit (HELOC), you might want to consider refinancing. The Fed’s benchmark does directly influence variable borrowing rates, so if you have one of these products and your rate is about to adjust, a payment increase could be around the corner. Refinancing before that point could help you save on long-term interest.

If you’re in either boat, talk to a mortgage professional to get an idea of what rates you qualify for. And be sure to compare interest rates from a few different lenders. That will help you get the best deal possible.