Why Interest Rates Increase To Combat High Inflation

Inflation rates are at a forty year high and consumers across the country are feeling the impact. From the higher cost of gas to higher prices at the grocery store, there seems to be no escape from inflation. The Fed seeks to combat our current inflation woes by increasing interest rates.

Under the assumption that Covid-19 related inflation would subside as the pandemic did, the Federal Reserve continued to buy bonds in order to provide the economy with as much monetary stimulus as possible. They did this to combat the harsh impact that Covid had on the job market as well as inflation. In an effort to influence short term and long term rates, the Fed bought bonds to create excess demand in the bond market which, in the long term, would drive down rates.

Unfortunately, the Fed assumed incorrectly, and as we have all been witnessing, the rise of inflation has ceased to slow down despite the pandemic dying down. Due to this miscalculation, the Fed has begun to increase interest rates in order to quell the highest inflation numbers we’ve seen in four decades.

The Federal Reserve’s effort to curb inflation through increasing interest rates have caused a spike in long term mortgage rates.



Rates Have Increased To Highest Level Since 2009

Here is what we are facing today:

  • A whopping 5.25% for 30-year fixed mortgage rates are at the highest level since 2009.
  • This rate hike is the fastest and largest increase to mortgage rates since 1994.
  • Monthly mortgage payments have skyrocketed since the start of last year, and are up 55%.
  • Monthly mortgage payments for a median priced home have risen upwards of $600 per month since December 2020.

Though the facts can paint a somewhat bleak outlook for those in the market for a home, there are some big silver-linings that shouldn’t be overlooked.


Graphic of house figures on chart showing increasing housing market rates

Higher Fed Rates Doesn’t Necessarily Mean Higher Mortgage Rates

Yes, long term mortgage rates have increased and may continue to do so. However, long term mortgage rates don’t always rise in tandem with a rise in interest rates. The Fed does not directly impact mortgage rates, but the monetary policies it sets more directly impacts the rate on 10-year Treasuries.

Historically, long term mortgage rates tend to move in tandem with the rate of  the 10-year Treasury note. The rate on the 10-year Treasury note is influenced by many different factors, like higher demand on U.S. Treasurys and expectations of future inflation. Signs of shifting within the inflation data are among the most important key developments to watch for in the coming months.

In the past, there has been evidence of mortgage rates falling as the Fed policy tightened. Long term rates always adjust themselves to best account for future possibilities, like the normalization of bond purchases or short term rate hikes. This paradox could be a huge positive for long term mortgage rates.

Widely regarded as the world’s safest asset, U.S. Treasurys will lower its yield when there is higher demand, which could then course correct the rise in mortgage rates. An increase in demand for the 10-year Treasury can be seen when turmoil occurs globally.

Many investors may rush to buy safe assets like the 10-year U.S. Treasury note during this tumultuous time with the ongoing Russian invasion of Ukraine. This could then trigger lower yields, and reduce mortgage rates. However, it must be said that due to inflation and the uncertainty in when it will slow down, global turmoil will make it harder for investors to determine when inflation will begin to fall.



Cool-Down On Scorching Hot Housing Market

High demand for houses have made the prospect of buying a home much more difficult for many. A slowdown in demand due to increased rates could give potential homebuyers less competition to secure their bid on the home of their dreams.

Higher monthly payments could scare off some potential buyers, and also lock out potential buyers altogether. As mortgage rates increase, some buyers could lose their eligibility to be approved for a mortgage since banks issuing mortgages base their decisions on debt-to-income ratios. This all could signal a cool down to the housing market, making it less competitive for potential home buyers.

These increases to interest rates have already begun to cool the frenzied buying environment of the current housing market, as less people are searching for homes for sale. According to chief economist at Redfin, Daryl Fairweather, online searches are down 10% year over year for keywords “homes for sale” and less people are showing up to open houses as well.

As prices and inflation may begin to cool, now might be the time for you to lock in a rate and find the home of your dreams without the pressures of high competition.

While rates are expected to continue to rise and with the uncertainty about when they will fall, now could be the perfect time to go close on your next home or investment property.


Reach out to a Homebridge Mortgage Loan Originator today to get the most up-to-date information on the market and current mortgage rates.

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