Fed Rate Hike Brings Borrowing Costs Higher

The Federal Reserve raised its benchmark interest rate for the first time since 2023 on Wednesday. This quarter-point increase brings the key rate to about 3.9 percent, which may not be enough to quell stubborn inflation.

The central bank's decision was influenced by ongoing disruptions from the Iran war, which has pushed up average gas prices by 7 percent in a month. President Donald Trump's sweeping tariffs have also contributed to inflation.

Mortgage rates are affected indirectly, and the benchmark 30-year fixed mortgage rate has reached an average of 7 percent ahead of the Fed's rate hike. Lawrence Yung, chief economist for the National Association of Realtors, stated that 'that's because inflation picked up after the oil price shock and continuing concerns about unconstrained inflation.'

Rising borrowing costs have stalled the housing market this year. Mischa Fisher, chief economist for Zillow, said the Fed's rate hike restores stability in the housing market in the long run, but lower inflation means mortgage rates can come down.