Today, the Fed has raised the Federal Funds Rate by 25 basis points.  This rate increase has been widely anticipated for some time.

Why did the Fed increase rate?

The Fed is tasked with two primary jobs.  The first is to keep inflation in check.  The second is to help employment stay at a reasonable level.  After spiking, post Covid lock downs, the unemployment rate has moved back down.  The unemployment rate is currently at it’s lowest level in 25+ years.

Inflation – transient or long term?

Although unemployment is at a low level, the rate of inflation has been spiking.  In the second half of 2021 there was debate about whether the increase in inflation was transient or not.  Transient inflation is when there are factors that cause a temporary spike in the inflation rate.  Typically, once these transient factors subside the inflation rate normalizes.

During Covid lockdowns, unexpectedly, the consumer continued to spend money.  Most of this spending was not occurring in retail stores as many were closed.  Online spending spiked.  Consumers were purchasing groceries, clothing and home supplies in record numbers.

All this purchasing led to supply chain issues.  The supply chain was backed up because employees had been laid off and slow to return.  Employees that were still working often missed days due to mandatory quarantine lock down.  Shipping and trucking companies faced the same issues.

The supply chain slowdown, caused prices on good to go up.  These were the first signs that inflation was picking up.  Many thought that once lock downs ended worldwide, the supply chain would get back to normal.  In this case many argued, even if it took a year or so, inflation would be transient.

Oil price = inflation?

The pandemic and lockdown kept people off the roads.  Many people were able to work from home.  Record numbers have not since returned to the office.  Some are now only in the office 2-3 days of work.  Millions of people have given up their commute.

Airports were empty during lockdown.  Air travel is just now starting to pick back up.  The strong decline in road and air travel led to falling gas prices.  The price oil is a big factor in the inflation rate.  In the second half of 2021 as the world came out of pandemic restrictions, oil prices started to rise.  With the rise in oil and still low unemployment rates, many now believe that inflation is long term.

The Feds Decision

The Fed must now decided where they stand on inflation.  If inflation is going to be long term and severe they may need to raise rates multiple times.  Raising rates is the best tool the Fed has to keep inflation in check.  The timing and number of increases is a fine line.

If the Fed is slow to raise rates inflation could take off in a short period of time.  This is similar to what occurred during the energy crisis of the late 1970’s.  If the Fed raises rates too quickly, on transient inflation, the economy could fall into

When the Fed Raises Rates Do Mortgage Rates Go Up?

The Fed does not directly impact mortgage rates.  The Federal Funds Rate is a short term rate used by commercial banks to lend to each other.  Mortgage rates are impacted by the broader market.  There are many factors that determine current mortgage rates.

Mortgage rates tend to follow the yield on the 10 year treasury.  When the yield increases, mortgage rates tend to move up.  A drop in the 10 year treasury may cause a fall in rates.  There have been times in the past where an increase in rate by the Fed has led to a drop in mortgage rates.   This odd divergent in Fed Funds Rate and mortgage rates happened in a non inflationary period.

Is it a Bad Time to Purchase a Home During an Inflationary Period if Mortgage Rates Will Rise?

During any economic period, there can be an argument for or against buying a home.  It is always important to determine if the down payment and monthly housing payment will suit your lifestyle.  If so, buying a home during an inflationary period can be a fantastic long term investment.  The interest rate and monthly payment may be higher than the previous year.

Property values will often continue to increase during inflationary periods.  Inflationary years can be a great time to build home equity through home appreciation.  As long as you are able to comfortably make your monthly housing payments this can be a great start to long term wealth.

This is not investment advice.  No investment is guaranteed to increase in value.  All potential investments should be considered carefully.