As Fed Pauses Rate Hikes, Mortgage Rates Could Stabilize

This article was first published on NerdWallet.com.

Home buyers looking for mortgage rates to stabilize or even drop got good news Wednesday, as the Federal Reserve announced a pause in its monthslong campaign of interest rate hikes.

The Fed controls the federal funds rate, a metric that directly affects short-term lending. But holding that key rate steady should filter through to other interest rates, including longer-term ones like mortgage rates. After a turbulent spring, with mortgage rates pingponging up and down as economic crises came and went, the central bankers' pause could provide a bit of relief.

Why the Fed took a break

After determining rising inflation wasn't just a temporary feature of the post-COVID-19 economy, the Fed began raising the federal funds rate in March 2022. The rate of inflation peaked at 9.1% in June 2022, the highest level in decades and substantially above the central bankers' goal of 2%.

Changing the federal funds rate — the interest rate banks charge each other for overnight borrowing — is the Fed's main tool for attempting to control inflation. Making this type of borrowing more costly makes borrowing more expensive across the board, which should slow down overall spending and price increases. But there’s a lag between the action and its desired effects.

David Bieri, an economist and associate professor at the Virginia Tech School of Public and International Affairs, compares raising the funds rate to using the brakes on a car — but with...