How did the FED increase rates and mortgage rates went down?

In recessionary periods, the most boring people in the world become household names - today it is the FED. It is probable that if you are in the real estate industry, you have, at a minimum, seen an article about the FED increasing interest rates once again. Agents probably have buyers asking what this means for their Pre-approvals, estimated monthly payments, or advice on what to do.

In short, yes, the FED increased interest rates by 75 bps (.75%) in an effort to fight inflation. However, as of today (7/29) mortgage rates have actually gone down. So now is an incredible time to get under contract on a house.

How is this possible? It is best analyzed by looking back at the FED's statements back in Q1 of 2021.

March 16th, 2021:

After their March meeting, the FED released a Press Release detailing their plans on how they would tackle the higher than estimated inflation numbers. This produced a roadmap for interest rates for the following two quarters of 2021 - to continue increasing interest rates in large hikes until we reach economic stability with inflation.

In response to this announcement, coupled with analysis of things like CPI and GDP, investors on the secondary market (Wall Street) began to increase interest rates for mortgages. The investors did this extremely aggressively, even faster than the FED did it. Wall Street tried to get ahead of the FED and priced these massive rate hikes into the market.

This is why you saw mortgage rates jump from the low-4% range in March to mid-5% range in May. That is an enormous swing in just 60 days. The secondary market did this because the FED gave them their roadmap in March. They knew exactly what was coming and wanted to make their money ahead of the FED.

Throughout July 2021, the debate among economists was if the FED was going to increase rates by 75 bps or 100bps. Naturally, Wall Street decided to take the higher of the two and priced in a 100bps rate hike in preparation for the July meeting. This is when you saw interest rates in the high-5%, low-6% range.

However, the FED ultimately decided to increase the rate by 75bps. On top of that, the FED indicated that the rate hikes would slow in pace and become more gradual as our economy adjusts to the new interest rates. In response to these two facts, interest rates swung back down from the highs in early July.

Today, buyer's will see rates in the high-4%, low-5% range in most situations.

TLDR - The secondary market preemptively priced in the rate hikes mapped out by the FED in their March meeting. After the July meeting, it indicated that the secondary market priced in the hikes more aggressively than the FED and these hikes will begin to slow. The rates came back down to match the new expectations in the market.

That is why interest rates have actually gone down as the FED raises rates :)