Though mortgage rates do not follow the federal funds rate, they do typically follow the yield on the 10-year Treasury. Following the Fed's announcement, the 10-year Treasury yield spiked as high as 2.246%, its highest level since May 2019.
Given recent economic uncertainty exacerbated by rising inflation, supply chain disruptions and the ongoing conflict in Russia-Ukraine, Thru the Cycle President John Lonski believes that anyone considering buying a home and taking out a fixed-rate mortgage should do so as soon as possible.
"If I'm thinking of buying that home and I want to get a fixed-rate mortgage, don't dawdle. Otherwise, who knows what you're going to be looking at in the future," Lonski told FOX Business. "If you want the home, go ahead and buy it and if you wait long enough, you're probably going to have that 10-year yield come down again, though it may not come down under 2% until the next economic downturn or recession."
In addition to Wednesday's rate hike, the U.S. central bank's policymakers signaled that six more hikes could be coming by the end of 2022.
According to the Mortgage Bankers Association, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 4.27% from 4.09% for the week ending March 11, with points rising to 0.54 from 0.44, including the origination fee, for loans with a 20% down payment. Applications to refinance a home loan fell 3% from the previous week and were 49% lower than the same week a year ago.
"With the unemployment rate below 4%, inflation nearing 8%, and the war in Ukraine likely to put even more upward pressure on prices, this is what the Fed needs to do to bring inflation under control," MBA Chief Economist Mike Fratantoni said in a statement. "Mortgage rates have been exceptionally volatile in recent weeks, given the profound uncertainties both with respect to the geopolitical situation and monetary policy. Hopefully, the Fed’s actions and explanations can help to reduce the policy uncertainty, which would then diminish some of the current volatility."
Looking ahead, the MBA forecasts that mortgage rates will rise to around 4.5% over the next year. Beyond the rate hike, Fratantoni emphasized that the MBA will be looking for details regarding the Fed's plans to shrink its balance sheet, in which treasuries and mortgage-backed securities will be allowed to passively roll off.
"Although we anticipate that shrinking the balance sheet will begin this summer, we will be looking for details regarding the pace of the runoff and whether they would consider active MBS sales at some point to return to an all-Treasury portfolio," Fratantoni said.