Interest rates may seem high in todayâs market based on the recent historically low interest rate environment, but interest rates were significantly higher in years past. I have heard interest rates were between 18-20 percent back in the 1980s. Interest rates are currently high as the Federal Reserve raised short-term interest rates aggressively to fight high inflation that was created by pent-up, consumer demand for products and services and supply chain disruptions related to the COVID-19 pandemic. The prime rate in March 2022 was 3.5 percent and increased to 8.5 percent in July 2023 to combat with inflation.
The Federal Reserve controls short term rates but long-term rates are based on long term U.S. economic growth forecasts. Short-term interest rates will decrease after inflation decreases to a healthy level of approximately 2.0 percent. Last year at this time the inflation rate was above 6.0 percent and in 2022 inflation was above 9.0 percent. Short-term interest rates will continue to stay stagnate until the Federal Reserve sees inflation remain at their 2.0 percent target. Economist are expecting interest rates to fall later this year.
I have often had clients think that the Federal Reserve actions on the overnight lending rate directly affect the 30-year fixed mortgage rates. However, this is not actually the case. The overnight lending rate does impact the Prime Index which directly impacts Home Equity Lines.
What plays more directly to the 30-year fixed rate is the inflation rate. When our inflation rate was on an upward march, the 30-year rate marched up as well at which point the Federal Reserve stepped in to take action to bring the inflation rate down by raising the overnight lending rate, and when the inflation came down, so did mortgage rates.
No one should have an expectation that rates will go back to the 2s or 3s as this was largely a result of the Covid-19 impact to our economy and our government stepping in to purchase securities to reduce interest rates and increase the money supply which helped banks during the pandemic. Barring another pandemic or some other catastrophic event, we likely wonât see rates that low in my remaining lifetime. My recommendation is to watch the inflation rate as this is a key component to the mortgage rate. Continued inflation improvement should improve mortgage rates.
Long-term loans track the rate, or yield, on the 10-year Treasury bond. Many types of loans effectively start with that rate, and then increase it to reduce the risk of not being repaid by borrowers.
When inflation is running high, the Fed raises those short-term rates to slow the economy and reduce pressure on prices. But higher interest rates make it more expensive for banks to borrow, so they raise their rates on consumer loans, including mortgages, to compensate. That has been going on for about two years now, with the Fedâs rate climbing above 5 percent, from near zero, and mortgage rates following suit. But mortgage rates have eased from the 20-year highs we saw this past Fall.
The Federal Reserve is looking for signs of the economy slowing: slower job growth, gains in personal income, and consumer spending. The Fedâs next meeting is mid-March and most economists think the Fed will keep things on âpauseâ at that meeting but may lower rates at their June meeting and beyond if signs point to moderating inflation.
Historically, current mortgage rates are âstill good.â Home prices are holding steady and/or increasing year over year. If you buy now, refinance later.