How Inflation Affects Mortgage Rates

When you read about the housing market in the news, you might see something about a recent decision made by the _Federal Reserve_ (the Fed). But how does this decision affect you and your plans to buy a home? Here's what you need to know. The Fed is trying hard to reduce [inflation](https://www.simplifyingthemarket.com/2023/06/23/homeownership-helps-protect-you-from-inflation-infographic/?a=713258-9a8342bcf821027012880bf1d7cccbf7). And even though there’s been 12 straight months where inflation has cooled (_see graph below_), the most recent [data](https://www.bls.gov/news.release/cpi.nr0.htm) shows it’s still higher than the Fed’s target of 2%: [](https://www.simplifyingthemarket.com/content/images/20230731/20230803-Inflation-Continues-Moderating.png?a=713258-9a8342bcf821027012880bf1d7cccbf7) While you may have been hoping the Fed would stop their hikes since they’re making progress on their goal of bringing down inflation, they don’t want to stop too soon, and risk inflation climbing back up as a result. Because of this, the Fed decided to increase the Federal Funds Rate again last week. As Jerome Powell, Chairman of the Fed_,_ [says](https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20230726.pdf): ###### _“__We remain committed to bringing inflation back to our 2 percent goal_ _and to keeping longer-term inflation expectations well anchored.”_ Greg McBride, Senior VP, and Chief Financial Analyst at _Bankrate_, [explains](https://www.nbcnews.com/business/economy/interest-rate-hike-july-2023-how-much-higher-federal-reserve-rcna96210) how high inflation and a strong economy play into the Fed’s recent decision: ###### _“__Inflation remains stubbornly high._ _The economy has been remarkably resilient, the labor market is still robust, but that may be contributing to the stubbornly high inflation._ _So, Fed has to pump the brakes a bit more__.”_ Even though a Federal Fund Rate hike by the Fed doesn’t directly dictate what happens with mortgage rates, it does have an impact. As a recent article from _Fortune_ [says](https://fortune.com/recommends/mortgages/what-fed-rate-hikes-mean-for-mortgage-rates/): ###### _“The federal funds rate is an interest rate that banks charge other banks when they lend one another money . . ._ _When inflation is running high, the Fed will increase rates to increase the cost of borrowing and slow down the economy._ _When it’s too low, they’ll lower rates to stimulate the economy and get things moving again.”_ #### How All of This Affects You In the simplest sense, when inflation is high, [mortgage rates](https://www.simplifyingthemarket.com/2023/07/19/explaining-todays-mortgage-rates/?a=713258-9a8342bcf821027012880bf1d7cccbf7) are also high. But, if the Fed succeeds in bringing down inflation, it could ultimately lead to lower mortgage rates, making it more affordable for you to buy a home. This graph helps illustrate that point by showing that when [inflation](https://www.bls.gov/cpi/) decreases, [mortgage rates](https://www.freddiemac.com/pmms/archive) typically go down, too (_see graph below_): [](https://www.simplifyingthemarket.com/content/images/20230731/20230803-Mortgage-Rates-Follow-Behind-Inflation.png?a=713258-9a8342bcf821027012880bf1d7cccbf7) As the data above shows, inflation (_shown in_ _the blue trend line_) is slowly coming down and, based on historical trends, mortgage rates (_shown in_ _the green trend line_) are [likely to follow](https://www.simplifyingthemarket.com/2023/07/05/two-questions-to-ask-yourself-if-youre-considering-buying-a-home/?a=713258-9a8342bcf821027012880bf1d7cccbf7). McBride [says](https://www.cnet.com/personal-finance/mortgages/mortgage-refinance-rates-for-july-26-2023-rates-advance/) this about the future of mortgage rates: ###### _“With the backdrop of easing inflation pressures,_ _we should see more consistent declines in mortgage rates as the year progresses__, particularly if the economy and labor market slow noticeably.”_ ### Bottom Line What happens to mortgage rates depends on inflation. If inflation cools down, mortgage rates should go down too. Let's talk so you can get expert advice on housing market changes and what they mean for you. Posted by [Ryan Drowne](https://www.thedavidgreengroup.com/blog/author/ryandrowne/) on August 15th, 2023 Enjoy this blog post? 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