Key facts
- US mortgage rates have hit 7%.
- Federal Reserve Chairman Kevin Warsh indicated a focus on fighting inflation.
- The Federal Reserve directly controls the federal funds rate.
- Higher federal funds rates indirectly contribute to higher mortgage rates.
- Credit card and HELOC rates are typically variable and move with the federal funds rate.
- Existing fixed-rate mortgage and auto loan payments are not affected by rate hikes.
US mortgage rates have climbed to 7%, with Federal Reserve Chairman Kevin Warsh signaling that further interest rate hikes are likely as the central bank prioritizes controlling inflation. Warsh stated, "The Committee will deliver price stability" and "We've missed for five years, and we're going to fix that," indicating a strong focus on bringing down inflation even if it means maintaining higher rates for an extended period or increasing them further.
While the Federal Reserve directly sets the federal funds rate, which influences overnight borrowing costs between banks, mortgage rates are more indirectly affected. Mortgage rates are more closely correlated with longer-term yields, such as the 10-year U.S. Treasury note. However, Fed policy decisions and communications shape investor expectations about inflation, economic growth, and future interest rates, which in turn impact the entire Treasury yield curve. Since mortgage rates are typically priced with a spread above the 10-year Treasury yield, higher Fed rates often translate to higher mortgage rates.
For consumers, the impact of higher Fed rates varies. Homeowners with existing fixed-rate mortgages will not see their monthly payments increase. However, other borrowing costs are more directly and immediately affected. Credit card rates, which are usually variable and tied to the prime rate (typically three percentage points above the federal funds rate), can rise quickly. Similarly, auto loan rates and Home Equity Lines of Credit (HELOCs), which are also often variable, tend to respond rapidly to Fed rate changes, increasing borrowing costs for new loans and existing variable-rate HELOCs. Federal student loans, which have fixed rates set annually, are influenced more indirectly by Treasury yields.