The Fed is meeting next week. Will it send mortgage rates higher?


Aly Yale
Military VA Loan contributor

Higher mortgage rates are likely in the cards

The Federal Reserve is set to have its third meeting of the year next week, and for hopeful mortgage borrowers, it’s probably not good news.

Given the nation’s skyrocketing inflation rate (the highest since the early 1980s), plus recent commentary from Fed Chair Jerome Powell, higher mortgage rates are almost guaranteed in the days and weeks following the bank’s May 3-4 meeting.

It will only add insult to injury in an already affordability-challenged housing market. Home prices are up 19% over the year, according to the Federal Housing Finance Agency, and last week’s average 30-year mortgage rate? That clocked in at 5.11% — a whopping 200-basis-point uptick since the start of the year.

For homebuyers and borrowers mulling a refinance, it signals one thing: Act now or pay more.

Click here to check today’s VA rates (May 26th, 2022)

What the Fed has planned for May

The Federal Reserve has already indicated it plans to tighten monetary policy as the year goes on. The bank increased the federal funds rate for the first time in six years at its March meeting, and Powell has indicated it will do so again at next week’s gathering too.

Only this time? Powell says a 50-basis-point hike is possible — double what was seen back in March.

“​​If you look at the last tightening cycle, which was a two-year string of 25-basis-point hikes from 2004 to 2006, inflation was a little over 3%,” Powell said last week at an International Monetary Fund meeting. “Inflation is much higher now, and our policy rate is still more accommodative than it was then. So it is appropriate, in my view, to be moving a little more quickly. That points in the direction of 50 basis points being on the table.”

To be clear: Inflation isn’t just “much higher” than the last time around — it’s significantly higher. Earlier this month, inflation came in at 8.5%, the highest point since 1981. So Powell’s hint at a more aggressive rate hike is probably more than just speculation. In fact, according to CME Group, there’s a 96.5% chance that the federal fund’s target rate will jump 50 basis points next week, putting it at 75 to 100 for the first time since pre-pandemic days.

How mortgage rates respond to Fed actions

To be clear: The Federal Reserve doesn’t dictate mortgage rates, but when it tightens policy, interest rates on loans and mortgages tend to rise.

Just take March’s Fed meeting as a case in point: After the bank raised the federal funds rate for the first time in years, mortgage rates surged. Rates on 30-year loans went from 3.85% prior to the meeting, jumped to 4.16% the week after, and have climbed steadily ever since. They’re now at 5.11%, 126 basis points higher than before the meeting.

Most experts predict mortgage rates will continue their upward climb on the backs of another Fed rate hike but just how far they’ll go is uncertain. One thing that’s for sure? Borrowers likely won’t see lower rates for some time (at least until inflation is under control).

Move quickly or adjust accordingly

If you’re eyeing a refinance or home purchase, your best bet is to lock in a rate quickly. Once the Fed announces its official actions next week, there’s no telling how high rates could climb in the weeks following.

If acting now just isn’t possible, you’ll want to adjust your expectations accordingly. Prepare for a higher monthly payment or reduced refi savings, and think about alternative loan options, like ARMs, which offer lower rates at the outset of the loan.

And if you’re still looking for a property, reduce your price range to ensure you stay on budget. You can also consider smaller properties or townhomes or expand your search into more affordable, rural communities. Both steps can help you offset the added costs that higher rates will come with.

Click here to check today’s VA rates (May 26th, 2022)