As we enter the second half of the year, many Americans are questioning the stability of the U.S. economy amid fears we could be heading into a recession.

Later this month, the Federal Reserve Open Market Committee will meet to discuss the likeliness of more interest rate hikes to address the nation's highest inflation in more than 40 years.

Consumer prices in June saw the biggest 12-month increase since 1981.

Mary Daly is the president and CEO of the Federal Reserve Bank of San Francisco, and she suggests that the COVID-19 lockdowns and the war in Ukraine have both contributed in part to rising costs across the globe.

"We have a strong economy but inflation is too high," she said. "As an economist and policymaker, I was less startled. It [inflation] is something you can expect because we had a pandemic. We locked down the economy and then opened back up suddenly. We're ready as consumers to get back out there and buy things and do things, but supply chains are completely under siege."

Last month, the Federal Reserve attempted to tame rising costs by raising its key interest rate by 0.75% — its largest hike since 1994. It was the third rate hike from the central bank this year and more are expected.

But Daly said she isn't concerned that the Fed is overcooking things in order to tame down inflation.

"I'm not concerned because we put extraordinary emergency accommodation into the economy," she said. "We put a lot of support into the economy. When we did that, the economy was supported through the pandemic, and now we're just dialing back that support as we raise the interest rates through the end of the year. That should help bring inflation down to help get the economy back in balance."

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WASHINGTON —

The Federal Reserve hiked its benchmark lending rate this week for the seventh time this year, capping a year of intense pressure on the housing market that pushed mortgage rates above 7% for the first time since 2002.

But now that the Fed has signaled a softer approach to cooling the economy instead of rolling out bumper rate hikes, potential home buyers are left to wonder: Will mortgage rates come back down? Or have buyers missed their chance?

No one knows exactly where mortgage rates will go in the months ahead. But most experts agree that we have seen the end of 3% mortgages for some time.

Mortgage rates have run up so far and so fast this year that many would-be homebuyers can no longer afford to buy a home. At the end of 2022, when rates were at 3%, few predicted that just a year later rates around this week’s 6.33% would come as a relief, having dropped from over 7%.

After starting the year at an average 3.22%, according to Freddie Mac, the 30-year fixed-rate mortgage took off last spring as the Federal Reserve embarked on a historic campaign to battle decades-high inflation by raising interest rates. By fall, mortgage rates had more than doubled, eventually topping 7% in October. Rates have receded slightly in recent weeks, but loans are still expensive — especially compared to the historically low rates buyers were getting during the pandemic.

Home shoppers have watched their buying power evaporate, with higher rates adding hundreds of dollars onto what they would pay each month.

High mortgage rates remain the primary impediment to home buying, according to a recent buyer and seller sentiment survey conducted by Fannie Mae. Homebuying and home-selling sentiment are both significantly lower than they were last year.

Based on the survey, people in the real estate market continue to expect mortgage rates to rise but home prices to decline, said Doug Duncan, Fannie Mae senior vice president and chief economist.

He said he expects mortgage demand to be dampened by affordability challenges, while “homeowners with significantly lower-than-current mortgage rates may be discouraged from listing their property and potentially taking on a new, much higher mortgage rate.”

Is this the new normal?

While the Fed’s rate hikes are expected to continue, many analysts anticipate they will be smaller than the recent bout of three-quarter-point hikes and will start to taper off as inflation starts to cool, which should mean mortgage rates will likely come down too.

The Fed does not set the interest rates borrowers pay on mortgages directly. But its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.

If rates do drop, just how low will they go?

“If inflation continues to decelerate over the next several months, mortgage rates will likely stabilize below 7%,” said Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors. “That’s still double the previous year’s rate, but it’s better than an 8% rate, which is the historical average for the 30-year fixed mortgage.”

Looking ahead, Melissa Cohn, regional vice president at William Raveis Mortgage, said buyers should expect rates to level off in 2023 around where they were in the years before the pandemic — around 4% or 5%.

“We had an active and healthy real estate market then,” she said.

But Cohn said she does not expect a “meaningful” decline in mortgage rates until the third or fourth quarter of 2023. “Mortgage rates will drop a bit in December, we’ll see a brief flurry of activity, but there are likely to be more increases in the new year.”

And don’t expect to see rates drop at the same speed at which they rose this year, she said.

“We have to remember mortgage rates come down much slower than they go up,” said Cohn. “Banks will want to see proof that rates are meaningfully coming down and not a one-shot wonder.”

The weekly swings in mortgage rates this year have been about three times the size of those seen in a typical year, said Danielle Hale, chief economist at Realtor.com. The Fed’s extra-large rate hikes aren’t the only thing causing that.

Economic uncertainty is creating a larger gap or “spread” between the 10-year Treasury yield and mortgage rates. Typically, mortgage rates are about two percentage points above the 10-year Treasury yield, but recently the gap has been wider.

The main driver of the widening spread is greater interest rate risk, according to a recent report from the Urban Institute.

“The uncertainty about the effects of Fed policy to date and about the trajectory of future policy has resulted in large movements in interest rates,” wrote Laurie Goodman and Michael Neal, the report’s authors.

Consumer mortgages are packaged and sold off to investors. The higher myeortgage rates are, the more money investors can make. But as rates fall, more homeowners will choose to prepay their mortgages or refinance, making the loans less attractive to investors.

“Volatility increases the level of mortgage rates, compared to Treasury rates, because of the prepayment option,” said Chester Spatt, professor of finance at Carnegie Mellon University’s Tepper School of Business. “If you’re in a new loan at 7% and rates go to 6%, you may choose to prepay and refinance into a lower rate.”

It is abnormal to have such a large spread, said Lawrence Yun, chief economist for NAR, adding that other times when the spread was wider were during the 2008 financial crisis and the early days of the pandemic.

“Hopefully this large spread will dissipate by the spring home buying season,” he said. “If so, maybe buyers will face mortgage rates in the 5’s.”

What buyers can expect

Lisa Sturtevant, chief economist at Bright MLS, a multiple listing service in the mid-Atlantic region, also expects mortgage rates to fall further in 2023, but she doesn’t expect them to drop quickly.

“We were in unprecedented territory with rates under 3%,” she said. “There is no reason to suggest we will be back there. But they will be down from where we’ve been.”

“Housing market activity will continue to be relatively sluggish — even if mortgage rates do begin to come down — since so many existing homeowners are locked into sub-3% loans and will still not be eager to move into a higher rate,” she said.

As a result, the inventory of available homes for sale will remain tight into 2023. In many markets this could guard against prices dropping by a significant amount.

“Prospective buyers may be tempted to try to ‘time’ rates to jump into the market when rates dip,” she said. “But timing rates is difficult.”

Instead, would-be buyers should shop around, getting quotes from multiple lenders, including different types like a large national bank, an online lender or a community bank or credit union.

“There is a lot of variability in rates, terms, and mortgage products in this changing market,” Sturtevant said. “It is more important than ever that buyers compare offers from different lenders to find the financing that works best for them.”

The Federal Reserve is signaling that it will increase interest rates this year to deal with rising inflation.

Financial experts say those rate hikes will be small —only a quarter to maybe half a percentage point at a time — since current interest rates are near zero. However, the impact will be felt right away.

"Where you're going to see the impact quickest is going to be on things like credit card debt and home equity lines of credit. That variable-rate debt tends to reprice very quickly," said Greg McBride, the chief financial analyst at Bankrate. "You'll often see that higher rate within one to two statement cycles. Things like mortgage rates tend to move in advance because mortgage rates are based more on the outlook for the economy and inflation."

McBride says Americans should consider making a few moves before interest rates climb.

First off, take care of credit card debt.

"This is the time to act aggressively by paying down and paying off that debt before it becomes costlier as rates rise," McBride said. "If you have good credit, take advantage of those 0% and other low-rate balance transfer offers. With the ability to transfer the balance to one of those low-rate cards, you do two things. One, you give yourself this runway to get that debt paid off once and for all. But in the meantime, you're also insulating yourself from higher interest rates."

McBride also says those considering refinancing mortgages should act quickly before rates increase. Refinancing now can cut monthly payments by $100 to $200.

However, McBride says there's no need to rush a car purchase.

"When it comes to something like buying a car, rising interest rates really are the least of your concerns because it has such a minimal effect on the monthly payments," he said. "A quarter-point increase in rate, it's really only a difference of about $3 a month on a $25,000 loan, so nobody's going to have to downsize from the SUV to the compact because of rising interest rates."

McBride expects inflation to stay above what we've been used to for several years. For the better part of a decade before the pandemic, inflation remained below 2%, but he expects rates to stay above 2.5-3% moving forward.

WASHINGTON — The Federal Reserve said Wednesday it would quicken the pace at which it’s pulling back its support for the post-pandemic U.S. economy as inflation surges.

Fed officials also said they expect to raise interest rates three times next year.

In an abrupt policy shift, the Fed announced that it would shrink its monthly bond purchases at twice the pace it previously announced, likely ending them in March.

The bond purchases were intended to hold down long-term rates to aid the economy but are no longer needed with unemployment falling and inflation at a near-40-year high.

The accelerated timetable puts the Fed on a path to raising rates in the first half of next year.

Earlier this month, the Labor Department reported that inflation jumped 6.8% in November compared with a year earlier. That marked the highest annual inflation rate since 1982.

Prices for commodities like food, gasoline and housing are rising rapidly, intensifying pressure on consumers — especially lower-income households.

A recent survey from the National Federation of Independent Businesses says 57% of firms are raising prices, while just 6% are cutting prices.