I’m seeing a lot of prophecy and misinformation around mortgage rates and inflation. Since we have a Fed rate hike on the table today , we should re-approach this topic.
Does the Fed raise mortgage rates?
NO. They’re related, but in a different way. Think of it this way.
Inflation is the sickness; fed rate hikes are (assumed to be) the cure.
Why are mortgage rates rising?
If you lend a friend $10,000 in January and charge them 3% interest, you make $300 per year off of that investment. Now, fast forward to June, and your gas tank costs 50% more to fill up and your groceries are 20% higher. If another friend wants to borrow money, you’re going to need to charge 5% per year so you can earn $500 on that investment. In fact, if you think the cost of living is going to continue to rise, you might go ahead and charge 6% per year because you’re committing that money for some time into the future, and you need a greater return to justify your investment. Or else, you’ll just leave the money in the bank.
This is how mortgage bond investors are thinking right now; it gets more complicated than that, but this is the basic idea.