The Federal Reserve yanked a short-term interest rate higher on May 4, making it more expensive to borrow money to buy a home (or fix it up), in the Fed’s attempt to slow inflation. It was a relatively drastic move as the 0.5%, or half a percentage point, move hadn’t been done since 2020. Investors and the financial community have been talking about it ever since. What does it mean for Orion, our valued brokers, and your clients?

First, it was expected, and the increase was no surprise to Orion’s management. Fed officials had been hinting for weeks that they would deliver a larger-than-usual rate increase, and mortgage rates already had risen sharply in anticipation of it, climbing roughly three-quarters of a percentage point from mid-March to the end of April.

Our brokers know that the Fed’s increase will cause other interest rates to rise, some directly and others indirectly. A higher federal funds rate will directly increase rates charged on adjustable-rate home equity lines of credit. They will rise 0.5% within a billing cycle or two. These loans, HELOCs, are often used to pay for home renovations.

The Fed also has an indirect impact on mortgage rates, which went up steadily through March and April because the markets knew this increase was coming. Mortgage rates, and all interest rates, are likely to keep climbing. In fact the marketsare already pricing in around eight to 10 rounds of Fed rate increases this year.

Orion’s brokers know that owning a home is a good hedge against inflation, as prices have been increasing. But higher mortgage rates could dampen fast-rising house prices, because many home buyers shop with a monthly payment in mind. As mortgages become more expensive, home buyers may be forced to shop forless-costly houses, which could slow the pace of home price increases and, inturn, restrain inflation. Home sellers must keep in mind that higher mortgagerates reduce affordability.

Higher interest rates affect more than home buyers. They change the math for HELOC borrowers and home sellers, too. Interest rates on variable-rate HELOCs are tied to the prime rate, which moves in lockstep with the federal funds rate. Homeowners with balances on their HELOCs may see their interest costs rise as the interest rate goes up. For every $50,000 owed on a HELOC, a 0.5% interest rate increase raises the monthly interest by $20.83.

And last week the Senate finally confirmed Fed Chair Jerome Powell for a second four-year term following delays surrounding other nominees the Biden administration had pitched for the central bank. In his first term, Powell has had to battle two major crises, including the COVID pandemic and 40-year highin inflation, recently turning to tighter monetary policy to combat the price pressures.

If the economy performs as the Fed expects, the central bank will raise the interest rate an additional 50 basis points at each of the next two meetings. "If things come in better than we expect, then we're prepared to do less. If they come in worse than we expect, then we're prepared to do more,"Powell continued. "I will also say that the process of getting inflation down to 2% will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels, and we know what that's like."

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