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Federal Reserve Hiked Interest Rates Again As Mortgage Rates Decrease

The Federal Reserve raised interest rates by half a percentage point on Dec. 14, 2022, to a range of 4.25 to 4.5%, the seventh increase this year. So far in 2022, the Fed has lifted its benchmark short-term rate, which influences most other borrowing costs in the economy, by 4.25 percentage points from a low of near zero as recently as March.

But even as the U.S. central bank lifts rates—and plans to keep doing so in 2023—homebuyers are beginning to notice a pleasant surprise: Mortgage rates have been falling.

What’s going on?

Brian Blank, a finance professor who has researched mortgage rates and bank loans, explains the paradox of falling mortgage costs at a time of rising base interest rates.

What’s Happening With Mortgage Rates?

After soaring for much of 2022, mortgage rates and other long-term rates are starting to come down.

The average rate on a 30-year mortgage has fallen 0.75 percentage points in the past month or so, after hitting a 20-year high of 7.08% in early November. Rates reached 6.33% on Dec. 8, the lowest level since September. This occurred over the same period as the Fed lifted its benchmark interest rate 2 percentage points.

Another key rate that fell is the yield on 10-year Treasury bonds, which has declined by a similar amount, to 3.5%.

Why Are Mortgage Rates Falling if the Fed is Still Hiking?

The short and rather boring technical answer is that bond markets anticipated this rate hike many months ago. And as market factors largely dictate the costs of borrowing, the increase was already absorbed into home loan rates.

Mortgage rates have fallen over the past month but remain above 2021 levels, leaving homes sitting on the market longer than during the pandemic boom. AP Photo/Julio Cortez

Mortgage rates, while rising due to the Federal Reserve’s rapid hiking pace, are actually more closely linked to the interest rate on Treasury securities, specifically the yield on the 10-year Treasury bond. That security began to anticipate the Fed’s interest rate increases a year ago and rose from less than 1.5% in December 2021

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