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The Federal Reserve Anticipates Rising Interest Rates in 2023

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Economics

The Federal Reserve Anticipates Rising Interest Rates in 2023


June 18, 2021
Federal Reserve
Photo: Aaron Kohr | stock.adobe.com

In Federal Open Market Committee meetings this week, Federal Reserve members said interest rates will likely rise twice in 2023. Interest rates today might increase in response, says Realtor.com, which has the potential to cool the red-hot housing market. Higher interest rates would price more buyers out, removing some competition from the market, possibly leading to fewer bidding wars. Realtor.com’s chief economist predicts mortgage rates exceeding just over 3% during the next few weeks. Mortgage rates for a 30-year fixed-rate loan averaged at 2.96% for the week ending June 10. But if the increases do come in 2023, interest rates might be between mid-3% and 4%.

While this may not sound like much of an increase, even fractions of a percentage point can have a substantial impact on a buyer’s bottom line. A single percentage point can add more than a $100 to a homeowner’s monthly payment and tens of thousands of dollars over the life of a 30-year loan, depending on the rate and size of the mortgage.

That could further slow down the market as more potential buyers could simply be priced out.

Mortgage interest rates are typically influenced by the Federal Reserve’s short-term interest rates. But they are more closely aligned with the 10-year U.S. Treasury bonds.

That’s because lenders typically bundle up mortgages they make and sell these mortgage-backed securities in the secondary mortgage market. This frees up cash they can use to make new loans. Investors view Treasury and mortgage bonds as safer, less lucrative investments than the stock market. If the economy is weaker, these bonds become more appealing. When it’s stronger or inflation is stronger, as it is now, investors aren’t as interested because the bonds are worth less if inflation is moving up quickly.

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