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Understanding the Fed Rate Hike

Understanding the Fed Rate Hike

The Fed met last week and, as expected, hiked the Federal Funds Rate by 25 basis points. Note that the Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates.

Looking at their dot plot chart, the majority of Fed members are expecting seven additional hikes this year. There are six remaining Fed meetings this year, which implies that there would have to be a double or 50 basis point hike at one of the upcoming meetings.

In addition, the Fed increased their 2022 inflation expectations by 65% from 2.6% to 4.3%. They also revised GDP lower from 4% to 2.8%.

The big negative for Mortgage Bonds was the Fed’s comments on their $9 trillion balance sheet. The Fed said that they would start to reduce their balance sheet at “a coming meeting” and in the Q&A session, Fed Chair Jerome Powell said they may finalize their plan at their next meeting in May.

So, what does all of this potentially mean for mortgage rates?

Remember that the Fed has two levers they can pull for tightening the economy – hiking their benchmark Fed Funds Rate and reducing their balance sheet. Hiking the Fed Funds Rate will actually be a good thing for mortgage rates, as the Fed curbs inflation and preserves the fixed return a longer data Bond provides.

However, reducing their balance sheet (which means allowing Bonds to fall off their balance sheet and no longer reinvesting in them each month) would cause more supply on the market that has to be absorbed. This can cause mortgage rates to move higher.

The bottom line is that we will want to closely watch how the Fed tries to walk the tightrope of hiking and allowing a balance sheet runoff during 2022.

For a free consultation to find out what you are preapproved for to purchase or a free mortgage fitness check up to make sure your current mortgage fits what your short and long-term financial goals are, as well as your payment and equity objectives, please call me at (702) 592-0722 or email me at

Michael Scialabba

Home Loan Strategist


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