Federal Reserve interest rate hike – what happens next?

Mortgage rates expected to go on a downward slide

Federal Reserve interest rate hike – what happens next?

Another month, another rate hike by the Fed.

The central bank previously telegraphed its intention of hiking the interest rate by another 25 basis points at its two-day meeting starting today (July 25) in an effort to bring inflation down to 2%. If applied, this would mark the 11th rate hike for the federal funds rate in the last 16 months – a series of increases that have contributed to bringing inflation down to 3%.

But what happens next? Will the anticipated hike for this month be the last one for a while?

Mortgage Professional America turned to Sarah Alvarez (pictured), vice president of mortgage banking at William Raveis Mortgage, for insight. “I think it’s essentially baked into the market already,” Alvarez said of the imminent 0.25% hike. “It’s been pretty consistent.”

Focused on tone

Given that another rate hike is all but a foregone conclusion, Alvarez is focused more on the tone of the Federal Reserve chairman’s remarks at meeting’s end. “At the end of the day, this is the story of what one might consider now an epic battle against very stubborn inflation,” she told MPA during a telephone interview. “Even more than a question of what happens will be the tone of what the Fed chair says. Are they going to fall into more of a dove-ish or hawkish category?”

Signs have consistently emerged that the Fed’s actions have had the desired effect, Alvarez noted. As evidence, she pointed to the latest CPI report showing inflation moderating to 3%. But seemingly incongruous data in other areas, such as robust employment numbers, contradict the idea of inflation – let alone a recession as many had predicted – and require more tinkering from the Fed to curb consumer spending.

“The inflation numbers, when they were released two weeks ago, they actually showed more signs of improvement suggesting that the work the Fed has been doing actually has been successful,” she said. “But at the same time, we also received jobs report information indicating that still remains such a robust piece of the economy. Unfortunately, because of that, we’re still in a position where the Fed’s work is not done yet.”

She agreed on the incongruity of strong employment numbers against a backdrop of supposed economic malaise fueled by inflation. “It defies what the expectation would be,” she said. “In terms of seeing the effects of all these increases the Fed has done, the general rule is that it takes about a year to see the impact. So we’re still really feeling what the initial impact is of those raises,” she said of consistent rate hikes from the Fed that began March 2022.

It’s been a roller-coaster ride for mortgage rates

It’s been a wild ride so far, she suggested. “It’s very contradictory and that has been what has made it so different to predict or understand what is necessarily going to happen with mortgage rates,” Alvarez said. “Because at the end of the day, while the lenders aren’t necessarily going to raise their rates in lockstep with what the Fed is doing, they’re looking for some consistent data reporting that would suggest things are stabilizing. We just continue to see information that ping pongs back and forth between good and bad news. I think they [lenders] are looking for less volatility, more stability

One thing is certain: There is no Fed meeting scheduled in August. “So mortgage rates for that particular month will be more specifically and directly impacted by those data numbers,” Alvarez noted. “Unfortunately for the consumer, of course, the banks are much faster to raise than to lower rates, although the general expectation remains that rates will continue to come down through the end of the year.”

Alvarez is keen on learning more about the Fed’s playbook: “We do hope that part of what is shared from the Fed meeting this week is that they will indicate an end or whether there are more raises – which the expectation is for at least one more after this one. But if they indicate they feel they’re optimistic, that their efforts have been successful, then we’ll see a little more stability – which will make things feel comfortable in terms of reducing rates. We also do believe that when rates start coming down, there will be a bit of a downward slide for a while.”

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