Fed readies for last meeting (and rate hike) of the year
A rate hike, but a smaller one
The Federal Reserve is heading into its final meeting of the year, and it looks like things might finally be slowing down — at least slightly.
The Federal Open Market Committee is still very much expected to increase its benchmark rate when it meets December 14-15. But most experts are predicting a smaller hike than those seen at the previous four meetings, which all included 75-basis-point jumps.
As Fed chair Jerome Powell said in his recent speech at The Brookings Institution, “It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.”
We won’t know for sure until next week, but most experts predict a smaller-than-November increase in the federal funds rate. If that comes to fruition, here’s what it will mean for homebuyers and mortgage borrowers across the country.
A 50-basis-point jump?
According to CME Group’s FedWatch tool, there’s a 75% chance the Fed will raise its rate by 50 basis points, taking the target range up to 4.25 to 4.50%.
Those chances are up quite a bit compared to a month ago when the likelihood of a smaller hike was just 61.5%.
Powell’s comments probably had much to do with this change.
He spoke at the research group on November 30 to discuss the country’s labor market and overall economic outlook, as well as the Fed’s mindset going into its December meeting.
“The labor market … shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2% inflation over time,” he said. “So despite some promising developments, we have a long way to go in restoring price stability.”
Powell later indicated that despite this, the central bank may begin easing off its rate hikes in the near future.
“Monetary policy affects the economy and inflation with uncertain lags, and the full effects of a rapid tightening so far are yet to be felt,” he said. “The time for moderating the pace of rate increases may come as soon as the December meeting.”
Will mortgage rates jump, too?
Whether the Fed increases its rate a little or a lot, it will likely trickle down to the mortgage market. Variable-rate mortgages, which are tied to the prime rate, will see almost immediate increases, and existing homeowners with those types of loans could see a bump in monthly payments.
For buyers and borrowers with fixed-rate mortgages, the impact won’t be as dire. Long-term mortgage rates often follow the Fed rate, increasing slightly when the Fed tightens its policy, but that’s not always true.
The rate on 30-year loans, for example, jumped after the March, May, June, September, and November meetings, when the Fed increased its benchmark rate. In July, though, 30-year interest rates actually fell following the Fed’s rate hike.
Keep in mind: These higher rates would only impact new buyers or homeowners looking to refinance. If you already have a fixed-rate mortgage, higher long-term interest rates shouldn’t affect your loan at all.
Making your move
There’s no way to know definitively what the Fed will do nor how much its policies will impact mortgage rates. If you’re eyeing a home purchase or refinance, get preapproved now to gauge what rate and payment you qualify for. If you end up just under the max of your budget, you may want to lock now before rates have the chance to move higher.
Additionally, if you have a variable-rate mortgage or short-term loan (like a HELOC), you might want to consider refinancing. This would ensure your rate won’t jump with any Fed moves next week.
If you’re not sure what the best move is for your finances, talk to a mortgage professional. They can point you in the right direction.