The Federal Reserve just made its most drastic move in two decades. The central bank increased the federal funds rate by a half a percentage point, moving the overnight lending rate to 0.75%-1%. The Fed also announced it will start to trim its balance sheet—which sits around $9 trillion—in an effort to tighten monetary policy and cool down inflation.
This was not an unexpected move for the markets, which had already priced in the .5% increase, but it was the biggest rate hike since 2000 and the first time the Fed instituted consecutive meeting raises since 2006 . Fed chairman Jerome Powell noted in a statement that any increase beyond .5% is not on the table at this time. Powell added, “Inflation is much too high and we understand the hardship it is causing. We’re moving expeditiously to bring it back down.”
It is always a good reminder that the Fed does not set mortgage interest rates, but the Fed’s moves do indirectly affect rates. Most consumers will feel the effects of the Fed’s rate increase in their credit card interest rate or their rate on a home equity line of credit (HELOC). Indirectly, banks will make up for paying more to borrow money themselves by making their own borrowers pay more to take out a loan.
Two days before the Fed made its move markets were reacting to the possibility with the 10-year Treasury note yield moving above 3.0% for the first time since 2018. Mortgage interest rates closely follow the trajectory of the 10-year note yield and will typically sit 2-3% above the yield on the benchmark note.
Freddie Mac’s 30-year fixed-rate mortgage average survey was taken before the Fed made its increase official, but the average still came in higher than the previous week at 5.27%. The previous week’s average was 5.1%. Freddie Mac’s analysts said, “Mortgage rates resumed their climb this week as the 30-year fixed reached its highest point since 2009. While housing affordability and inflationary pressures pose challenges for potential buyers, house price growth will continue but is expected to decelerate in the coming months.
While rising rates have pushed mortgage origination down, mainly due to refinances plummeting drastically, there is a sector of the industry that is starting to peak—adjustable rate mortgages (ARMs). Ok, so a lot of you who lived through the 2008 financial crisis as adults probably have warning bells going off in your head right now. Aren’t ARMs one of the reasons the housing market crashed?
Short answer is no, the loans themselves were not the problem, rather it was the institutions and their lending practices that were a large part of the issue. We have come a long way since 2008 and have much stricter income verification and qualification rules in place. It is always best to discuss your options with a Movement Mortgage loan officer, but right now, an ARM could be a great option to secure a much lower interest rate for a shorter term. Just make sure you are aware of all the pros and cons of an ARM and what it means for you financially if you keep the same mortgage loan and go past the initial term.
THE LABOR SITUATION
The latest jobs report from the Labor Department shows that 428,000 jobs were added in April with the unemployment rate unchanged at 3.6%. This was slightly higher than economists’ expectations of 400,000 jobs added.
Meanwhile private payrolls increased by just 274,000 in April, well below the estimate of 390,000, according to ADP’s latest data. Small private companies, meaning those with fewer than 50 employees, saw the biggest decline with 120,000 workers lost.