This isn’t the first time the Fed has changed the federal funds rate. It has a history of rate increases – and decreases – because various events throughout time have made them necessary. Here’s what the past decades have looked like in the economy and mortgage industry since data became available from Freddie Mac in 1971. The average annual mortgage rates used are for 30-year, fixed-rate mortgages. Average mortgage rates fluctuated between 7.5% – 9% for most of the decade due to several factors, including energy crises and decisions made by the government. With a focus on unemployment, the Fed adopted a stop-go policy that would lower interest rates to increase inflation and lower unemployment, then turn around and raise rates to lower inflation. The attempt proved fruitless as, by the end of the decade, both unemployment and inflation were high. In 1979, mortgage rates shot up to just over 11%. With a new chairman, the Fed focused on combating inflation, which was at 13.5% in 1980. This effort to tighten the money supply caused interest rates to rise dramatically and the country entered a recession in 1981. At this time, the average annual mortgage rate was at its highest in recorded history, 16.63%. However, by 1989, mortgage rates and inflation were down to 10% and 4.82%, respectively.The 1970s
The 1980s
The 1990s
The ’90s saw a decrease in both inflation and interest rates. The decade saw an economic boom, thanks in part to an acceleration of productivity that many feel is due to the internet and other technological developments. By the end of the decade, mortgage rates were just under 7%.
The 2000s
The country entered the new millennium on a high from the economic boom and technological advances of the ’90s, but was quickly brought down when, first, the tech bubble burst in March 2000 and after 9/11. The country entered into the Great Recession in 2007, one of the worst economic downturns in U.S. history. In 2009, the country actually experienced deflation (a negative inflation rate). To help stimulate the economy, the Fed slashed interest rates to near zero. As a result, average mortgage rates fell to just above 5%.
The 2010s
Still recovering from the end of the previous decade, borrowing costs remained low in the 2010s, with annual average mortgage rates ping ponging between 4.69% and 3.65%. By 2019, the annual average was 3.94% and inflation was under 2%.
The 2020s
We’re only a few years into the 2020s, but we’ve already experienced global events that have impacted the economy in a big way. COVID-19 spread in the United States, and the entire country went into lockdown. In response to the pandemic, the Fed lowered rates to near zero. For the first time, the 30-year fixed rate dropped below 3%. However, this was never going to be a permanent fixture – especially when the true impact of the pandemic started to show.
COVID-19 created a lot of issues, from supply chain disruptions and staffing issues to surging production costs and high demand of products and services due to financial help from the government. All of these have a role to play in the dramatic rise of inflation. Oil prices have also increased significantly, contributing more to inflation, which is now at a 40-year high.
2022
To combat inflation, there were several Fed rate hikes in 2022. Here’s a recap of the rate hikes we saw last year:
- March 2022: The Fed raised its federal funds benchmark rate by 25 basis points, to the range of 0.25% to 0.50%. The rate hike marked the first time since 2018 that the Fed has increased rates.
- May 2022: The Federal Reserve issued another statement that it would again raise the target range for the federal funds rate to between 0.75% and 1%. In an effort to lessen the size of the Federal Reserve’s balance sheet, the Fed also announced that it would be reducing its holdings of Treasury and mortgage-backed securities.
- June 2022: The Fed raised the rate by an additional 75 basis points, or 0.75%, in an effort to curb the continued elevation of inflation. This increase brought the target rate range between 1.5% and 1.75%, and it marked the largest single rate hike since 1994.
- July 2022: After Consumer Price Index numbers showed inflation was 9.1% on an annual basis, the Fed raised interest rates an additional 0.75% to a target range of 2.25% – 2.5%.
- September 2022: The Federal Reserve increased the target for the federal funds rate another 0.75% to a range of 3% – 3.25%.
- November 2022: In November 2022, there was another 75 basis point increase. At this point, the federal funds target rate was up to 3.75% –4.0%.
- December 2022: The final Fed rate hike of 2022 occurred in December, bringing the federal funds interest rate target range to 4.25% – 4.50%.
The projections mean the central bank believes additional rate hikes will be necessary to hit their target inflation rate of 2%. In fact, many experts predict increases throughout 2022 (at each of the Fed’s remaining meetings) with the next anticipated hike happening in November. The remaining meetings on the Fed calendar are in November and December.
For consumers, this means financing of many kinds – including credit card debt, car loans and mortgages – will become more expensive.
