The Fed raises interest rates again — will mortgage rates go even higher? 

The Federal Reserve raised its key interest rate by .75% Wednesday, a move that could further drive up the cost to borrow money for home buying. The rate affects interest rates on longer-term loans, including mortgages.

Increasing interest rates is a primary tool for battling inflation — which, at 8.2% according to the U.S. Department of Labor, is at a near four-decade high in the U.S. The Fed's goal is to normalize inflation to a rate of 2%.

Laurence Yun, chief economist with Realtor.com, offered a mixed reaction to the news. "Even with the Federal Reserve raising its short-term Fed funds rate by another large amount, longer-term interest rates look to move only slightly. The mortgage market has already priced in the latest Fed move," Yun predicted. 

Yun, however, noted that "mortgage rates are at near 20-year highs, and that hurts homebuyers." And, Yun does not foresee borrowing costs dropping anytime soon. "Once inflation is contained, mortgage rates will start to drift lower. It may be another year or two before that happens," he said.

Sixth rate hike since March

The Fed's announcement Wednesday marked the sixth time since March 2022 that interest rates have been raised. The last time the Fed raised interest rates multiple times to curb inflation was in the early 1980s, when inflation was close to 14%.

"At some point it will become appropriate to slow the pace of increases to bring inflation down to our 2% goal," Fed Chair Jerome Powell said Wednesday at a press conference. "We still have some ways to go…. We will stay the course until the job is done." 

The Fed's goal in raising interest rates is to dampen consumer spending, which is expected to drive prices down and reduce inflation across the economy. In 2022, consumers are facing higher interest rates on personal credit cards, for auto loans and other forms of debt, in addition to higher rates for home mortgages.

Effects on the housing market

Ruben Gonzalez, chief economist with Keller Williams, said that as the Fed increases interest rates the housing market — "one of the most rate-sensitive industries" — will continue to slow. Higher interest rates have made it more costly to buy homes in 2022. 

"Real estate markets have been impacted by higher rates for several months and we expect sales and price declines to continue into 2023," Gonzalez said. "Most homeowners have mortgage rates that are half of the current 30-year rate, and as a result listings have slowed along with sales."

For the week that ended July 21, 2022, interest rates were a little over 3% for a 30-year fixed rate mortgage, BankRate reported. For the week that ended Oct. 26, 2022, interest rates topped 7%, according to BankRate's national survey data. 

"As things stand, the housing market appears well-positioned to weather slower activity as we move into 2023, but [is] unlikely to see any improvement until we are in an economic environment that will accommodate lower or, at minimum, more stable mortgage rates," Gonzalez said.

Dr. Lisa Sturtevant, chief economist with Bright MLS, said that the future pace of rate hikes will depend on how effectively the Fed is able to reduce inflation in the short term. "One thing is clear — don't expect rates to fall any time soon," Sturtevant said.