The Federal Reserve announced Wednesday that interest rates will go up .75 of a point as part of the board's effort to slow inflation. The increase marks the highest interest rates have been since 2008.

The higher interest rates make borrowing for items such as homes and cars more expensive.

The Fed Board voted unanimously to raise interest rates.

"Recent indicators point to modest growth in spending and production," the Fed said. "Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks."

The risk of raising interest rates, experts say, is that it could cause the U.S. to slip into a recession.

The effective federal interest rate is now over 3% for the first time since January 2008. Interest rates peaked at 5.25% in late 2006 and early 2007, roughly a year before the U.S. went into a recession.

From 2009 through the middle of 2017, interest rates remained below 1% before reaching a peak of around 2.42% in 2019.

In response to the pandemic, the Fed lowered rates nearly to 0 until early this year. But with the highest inflation in over four decades, the Fed has responded with a rapid succession of rate hikes.

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.”

As Americans continue to feel the cost crunch of inflation, many people are turning to credit card rewards programs to make ends meet.

Research firm Morning Consult found about half of Americans say the rise in inflation and cost of living has made them more interested in earning credit card rewards.

"Among people who have credit card rewards cards, 91% of those people find them useful in everyday purchases," said Clint Henderson, managing editor of The Points Guy, a website that offers resources about rewards cards.

There are various benefits to having a rewards card. They include getting cash back, points and travel miles.

Those benefits can help pay for things like groceries, gas or vacations.

Henderson cautions, though, not everyone should be applying for a rewards credit card right now.

"We always tell people, 'You have got to pay your balance off every month. If you can't do that, then don't bother opening a rewards credit card," he said.

People don't necessarily need a credit card to earn rewards. Some banks offer debit cards that also feature rewards programs.

The Biden administration says it will cancel more than $70 million in student debt for borrowers who say they were defrauded by the for-profit DeVry University.

It marks the first time the Education Department has approved such claims for an institution that’s still in operation.

About 1,800 former DeVry students will get their loans cleared after the department concluded that the school lied about the success of its graduates.

“The Department remains committed to giving borrowers discharges when the evidence shows their college violated the law and standards,” said U.S. Secretary of Education Miguel Cardona. “Students count on their colleges to be truthful. Unfortunately, today’s findings show too many instances in which students were misled into loans at institutions or programs that could not deliver what they’d promised.”

The agency said Wednesday it plans to force the school to cover the cost of the $71.7 million in loan discharges.

DeVry said it disagrees with the agency's conclusions.

Borrower defense discharges were also announced for some students who attended Corinthian Colleges, Marinello Schools of Beauty, Minnesota School of Business and/or Globe University, the nursing program at ITT Technical Institute and Westwood College.

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.

Interest rates continue to remain low and that's putting the potential for families to save tens of thousands of dollars by refinancing to a 15-year mortgage.

“You know, if you're building equity faster with a 15-year mortgage, that's just kind of sign, hey you want to stay in that home and own it free and clear as soon as possible,” said Holden Lewis, a mortgage expert at NerdWallet.

Lewis says he doesn't see interest rates rising anytime soon. The Federal Reserve wants to keep people borrowing to stimulate the economy.

The savings can be enormous, because not only are you paying down the home faster, but you get the loan at an even lower interest rate.

Take a $200,000 home. At 3% for 30 years, you pay more than $100,000 in interest. The same home at 2.5% for 15 years will save you about $63,000 in interest.

The trade-off is the higher payment, about $500 more a month. But it could be less if you're currently paying mortgage insurance and you can drop that in a refinance.

“And that $500 a month could go toward retirement savings, savings for a rainy day, you know, your child's day care. So, there's a lot of competing things that you have to balance against each other,” said Lewis.

If higher payments seem too risky, you could always pay extra on your current mortgage, but that takes discipline.

With the housing market so hot right now, Lewis sees that as a positive for people who may have had financial hardships and need to sell.

“When people have forbearance for a long time, it gives them time to fix up their homes and list them and sell them, so they don't have to do it in an emergency. They don't have to do it in a fire sale type situation and that will keep house prices from falling,” said Lewis.

Homes are sitting on the market only about 21 days, selling about two weeks earlier than they were a year ago.