Interest rates are expected to soon rise, even as the Federal Reserve announced on Wednesday that it would keep its benchmark rate near zero. The Fed, however, warned that it was preparing to taper its emergency stimulus efforts from the pandemic, including winding down its bond purchases. That is expected to make mortgage rates rise, as well as rates on credit card and car loans.
“Tapering itself is going to increase yields in the medium- and long-term horizons, which will translate into higher borrowing costs,” Yiming Ma, an assistant finance professor at Columbia University Business School, told CNBC.
The Fed has purchased $40 billion worth of mortgage-backed securities each month as part of the stimulus program during the pandemic. That has brought a surge of liquidity into the mortgage market. It has allowed lenders to drop interest rates.
Mortgage rates have been ultra-low for over a year. Freddie Mac reported that the 30-year fixed-rate mortgage averaged 2.86% last week.
Long-term, fixed mortgage rates will move higher as soon as the Fed starts to slow the pace of bond purchases, Ma told CNBC.
“The moment the Fed starts pulling back, they will have an immediate effect,” George Ratiu, manager of economic research at realtor.com®, told MarketWatch. Even before the Fed does so, rates could rise. Mortgage rates follow long-term bond yields, like the 10-year Treasury note. Long-term bond yields began to rise after the Fed’s statement on Wednesday.
The National Association of REALTORS® has been predicting rates will rise over the next few months: They predict the 30-year fixed-rate mortgage to average 3.5% by mid-2022.
National Association of REALTORS®
Reprinted with permission
