As 2021 wraps up, you’ve probably heard the news that the Federal Reserve has had meetings and announced their plan to address rising inflation across the United States.
There are a few actions that the Federal Reserve can take to try to lessen inflation, namely raising the federal funds rate and quantitative easing. Today, the federal funds rate is .25%. This is the interest rate that banks pay to borrow money. Since March 2020, this rate has stayed at .25%. The lower the funds rate, the lower interest rates are for consumers. If the funds rate goes up, then interest rate for consumers will go up. The Federal Reserve announced in mid-December 2021 that they plan on raising the funds rate three times during 2022.
The federal funds rate increase will impact the interest rate for credit cards, HELOCs, and auto loans. While mortgage interest rates are also affected by the funds rate, they are more impacted by quantitative easing. Quantitative easing is when the Federal Reserve buys mortgage-backed securities from Wall Street. Almost all mortgages are aggregated and sold as mortgage-backed securities. The more the government buys, the lower mortgage interest rates go. If the government stops buying the mortgages, then interest rates will increase. The Federal Reserve has said they will reduce the purchases of mortgages and will end those purchases by March 2022.
This means you can expect mortgage rates to increase next year, unless of course they change their mind and keep buying. Raising interest rates is the best tool the government has to fight inflation. So, if you’ve held off on a refinance of your home or are considering a home purchase in Colorado, time is of the essence. Contact Indigo Mortgage today to get started.