The Impact of Inflation on Mortgage Rates

You might come across information about a recent Federal Reserve (the Fed) decision when reading about the housing market in the news. But how does this decision affect you and your plans to buy a home? Here's what you need to know.

The Fed is working hard to bring inflation down. And even though there’s been 12 straight months where inflation has cooled (see graph below), the most recent data shows it’s still higher than the Fed’s target of 2%: 

While you may have hoped that the Fed would stop raising interest rates since they are making headway toward their aim of lowering inflation, they don't want to stop too soon and risk inflation rising again. As a result, the Fed decided to raise the Federal Funds Rate again last week. As Jerome Powell, Chairman of the Fed, says:

“We remain committed to bringing inflation back to our 2 percent goal and to keeping longer-term inflation expectations well anchored.”

Greg McBride, Senior VP, and Chief Financial Analyst at Bankrate, explains how high inflation and a strong economy play into the Fed’s recent decision:

“Inflation remains stubbornly high. The economy has been remarkably resilient, the labor market is still robust, but that may be contributing to the stubbornly high inflation. So, Fed has to pump the brakes a bit more.”

Even though a Federal Fund Rate hike by the Fed doesn’t directly dictate what happens with mortgage rates, it does have an impact. As a recent article from Fortune says:

“The federal funds rate is an interest rate that banks charge other banks when they lend one another money . . . When inflation is running high, the Fed will increase rates to increase the cost of borrowing and slow down the economy. When it’s too low, they’ll lower rates to stimulate the economy and get things moving again.”

How All of This Affects You 

In the most basic sense, when inflation is high, so are mortgage rates. However, if the Fed is successful in lowering inflation, it may eventually lead to lower mortgage rates, making it more affordable for you to buy a home.

This graph helps illustrate that point by showing that when inflation decreases, mortgage rates typically go down, too (see graph below): 

As the data above shows, inflation (shown in the blue trend line) is slowly coming down, and, based on historical trends, mortgage rates (shown in the green trend line) are likely to follow. McBride says this about the future of mortgage rates:

“With the backdrop of easing inflation pressures, we should see more consistent declines in mortgage rates as the year progresses, particularly if the economy and labor market slow noticeably.”

Bottom Line

Inflation determines what happens to mortgage rates. If inflation falls, mortgage rates should fall as well. Let's discuss so you can get expert guidance on developments in the property market and what they mean for you.