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By Giulia Carbonaro
Senior Reporter
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The Federal Reserve is widely expected to raise its interest rate on Wednesday for the first time in three years, in a move that could increase borrowing costs for already-struggling American would-be homebuyers.
In his late August speech in Jackson Hole, Wyoming, the central bank’s chairman Kevin Warsh acknowledged that inflation has been "too high" for too long, admitting that "the responsibility for 65 months of sustained, elevated inflation" in the United States "sits squarely with the central bank."
But, while his words were interpreted by many as declaring that the Federal Reserve must act on higher inflation, Warsh did not make any pledge to do so. A rate hike became a much more credible threat after the country’s core inflation came in slightly hotter than expected in the latest report released on Friday.
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The consumer price index rose 0.4 percent in August, putting the 12-month increase at 3.4 percent, in line with expectations. But the core CPI, which is stripped of food and energy prices, accelerated 0.3 percent for the month, as the annual inflation rate stood at 2.4 percent, the Bureau of Labor Statistics reported.
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This is one key indicator that the central bank’s rate-setting body, the Federal Open Market Committee (FOMC), will take into consideration when making a decision on a possible rate hike on Wednesday.
The central bank’s funds rate, which influences consumer borrowing costs like credit cards and mortgages, is currently between 3.5 percent and 3.75 percent. Markets are anticipating a quarter-point hike to be announced this week.
What a Rate Hike Could Do to Mortgage Rates
The Federal Reserve’s rate-setting body is taking its decision as mortgage rates are hovering between 6.9 percent and 7 percent and the 10-year Treasury yield recently climbed above 5 percent, its highest level since the fall of 2023.
While the central bank does not directly set mortgage rates, their fluctuations are driven by the bond market and long-term investor expectations, which are heavily influenced by the Federal Reserve’s decisions. The 10-year Treasury yield influences mortgage rates because it sets the benchmark for long-term borrowing costs, with lenders pricing fixed-rate mortgages at a spread above the Treasury yield to compensate for risk and other costs.
High mortgage rates—together with rising home prices, property taxes, and homeowners insurance premiums—have been one of Americans’ many challenges to homeownership over the past few years. After the Federal Reserve launched an aggressive rate-hiking campaign in 2022 to stop the rise of inflation, mortgage rates nearly doubled from their pandemic lows of 2-3 percent.
Since then, they have not come down significantly. While, in late February, just before the U.S. and Israel launched joint strikes on Iran starting the war in the Middle East, the average 30-year fixed-rate mortgage had reached 5.98 percent, rates have since shot back up, reaching again above 6.5 percent as of July.
As of the week ending on September 10, the 30-year fixed-rate mortgage was 6.76 percent, according to Freddie Mac. That was the highest level in 15 months, further hindering many American first-time homebuyers’ chances of stepping onto the property ladder.
But, while normally a rate hike by the Federal Reserve triggers higher mortgage rates, this might not be the case this time, according to experts.
"In 2025, when the Fed was cutting rates, mortgage rates went up. So, who’s to say that in 2026, if the Fed raises rates, that mortgage rates can’t come down?" Melissa Cohn, Regional Vice President of William Raveis Mortgage and 44-year industry veteran, said in a statement shared with Newsweek.
"If the move is already priced in and the Fed convinces investors that inflation is coming under control, 30-year fixed rates could remain steady or even move lower," loanDepot Chief Investment Officer and Head Economist Jeff DerGurahian explained.
What will move mortgage rates, DerGurahian said in a statement shared with Newsweek, is "whether the Fed’s statement, the vote and Warsh’s press conference give investors confidence that inflation is coming under control."
Essentially, if investors believe a rate hike this week "will contain inflation rather than mark the beginning of a long series of increases, mortgage rates could remain steady or even move lower," according to DerGurahian.
If investors are not convinced that the central bank is firmly at the wheel, with higher oil prices and the risk of sustained energy-driven inflation posed by the ongoing war in Iran, things may be different.
What It Means for the Housing Market
The bottom line is that, one way or another, affordability is not likely to improve in the U.S. housing market. The only concern is that, if mortgage rates rise as a result of the Federal Reserve’s meeting this week, it might become worse.
More sellers might be "locked" into their lower-mortgaged homes as a result of higher rates, diminishing the supply of for-sale homes on the market. And more first-time buyers might be priced out of homeownership. Home sales have already slowed to a grind this year: according to the National Association of Realtors, existing home sales nationwide dropped to a 14-month low last month, falling 2 percent to a seasonally adjusted annual rate of 3.98 million units.
But, somehow optimistically, Compass real estate agent Jake Kennedy told Realtor.com he does not expect the central bank’s decision to affect buyers and sellers much.
"Money has been expensive for a long time, and the majority of buyers and sellers have already adjusted their behavior," he said. "I will tell my clients the same thing I have been telling them for years: don’t buy or sell a house because of one Fed meeting. If you need to move, you will find a way to make the numbers work, even if it means renting for a year or two."
"It’s crazy what’s going on, but there are people who still need to buy houses," Cohn said.
"People are moving forward, even if they’re unhappy with where mortgage rates are, knowing they’ll have to refinance. They’re considering alternatives such as an adjustable-rate loan or an interest-only loan, and if a loan carries a prepayment penalty, they’re minimizing it so they can refinance when rates settle back down," she added.
"Every eighth of a percent higher on a rate is another group of buyers that don’t qualify. People are going to have to downsize their expectations."
There are signs that what Cohn mentioned is already happening, with the Mortgage Bankers Association (MBA) reporting a recent increase in Americans picking up adjustable-rate mortgages, also known as ARMs. This is a type of riskier home loan that comes with an interest rate that stays fixed for a set period, up to 10 years, and then changes periodically based on market benchmarks or a lender-set percentage.
Joel Berner, senior economist at Realtor.com, told Newsweek that Americans’ growing demand for riskier loans "is a sign of eagerness to buy amid binding affordability constraints."
Contact Newsweek editors on this story: Matthew Robinson and James Debens
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