The Fed gears up for its first meeting of 2023; what will it mean for mortgage rates?


Aly Yale
Military VA Loan contributor

Experts predict a rate hike — but less than last year

The Federal Open Market Committee’s first meeting of 2023 is near, and if early predictions are right, the group will vote to raise its benchmark rate by 25 basis points.

That’s a smaller bump than December’s — and most of 2022’s, for that matter — but an increase nonetheless.

As Philadelphia Federal Reserve Bank President Patrick Harker said at the New Jersey Bankers Annual Leadership Forum, “I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed. In my view, hikes of 25 basis points will be appropriate going forward.”

If the FOMC does increase its rate during its Jan. 31-Feb. 1 meeting, it could mean another bump in mortgage rates. Here’s what that might look like for consumers.

Check your VA mortgage rates. Start here (Mar 3rd, 2024)

Pulling back on rate hikes

The Fed has been increasing rates steadily for the last year, hoping to get a handle on rising inflation. It all started in March 2022, when the Fed voted on a 25-point increase — the first increase since 2018.

It quickly moved to 75-basis-point hikes for much of 2022, only pulling back in December, with a 50-basis-point hike.

It seems the strategy is starting to work. Inflation for the 12 months ended December 2022 sits at 6.5% and has clocked its sixth decline in as many months.

“We’re beginning to see the kind of actions that we need to see,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, told The Associated Press. “Good signs that things are moving in the right direction. That’s important input into how we’re thinking about where policy needs to go.”

As a result of these improvements, most economists expect the Fed to pull back on its rate hikes as we head into the January meeting. A Reuters poll shows over 80% of forecasters project a 25-point hike. CME Group’s FedWatch tool puts the chances higher — at 99.2% as of January 20.

Mortgage rate impacts

Should the Fed opt for a 25-basis-point increase next week, the hike could trickle down to mortgage rates. While the Fed rate doesn’t directly influence long-term mortgages, historically, rates on these loans do rise when the Fed’s benchmark rate increases.

It doesn’t always happen, though. After the Fed’s March, May, June, September, and November rate hikes, for example, 30-year interest rates rose. July and December, however, saw rates fall or hold steady after the Fed’s hike.

The real difference will be felt on adjustable-rate mortgages, which rise and fall in step with the Fed’s rate. For homeowners who have these products (or are considering them for a refinance), choosing a fixed-rate mortgage may be the better option — particularly with the Fed eyeing continued rate increases across 2023.

Make your moves now

The Fed is meeting on January 31 and will announce any rate hike it makes by February 1. If you’re considering a refinance, plan to buy a home, or have an adjustable-rate loan right now, you may want to connect with a mortgage lender before that point to explore your options. Acting now could help you avoid a costly rate increase.

Check your VA mortgage rates. Start here (Mar 3rd, 2024)