Powell has recently suggested that the Fed might need to raise interest rates beyond previous expectations due to strong economic data and inflation concerns.

While some of the unexpected economic strength may have been due to warm weather and other seasonal effects, Powell said the Fed was cognizant that it may also be a sign it needs to do more to temper inflation. This may include returning to larger rate increases than the quarter-percentage-point steps officials had been planning to stick with.

Powell's remarks, his first since inflation unexpectedly jumped in January, sparked a quick repricing in bond markets. Investors boosted bets to more than 70% that the Fed would approve a half-percentage-point rate increase at its upcoming March 21-22 meeting, and lift the anticipated endpoint for rate increases.

The Fed's benchmark overnight interest rate is currently in the 4.50%-4.75% range. The potential for further rate hikes is raising concerns about the impact on mortgages and borrowing costs for homebuyers.

The Impact on Mortgages

The Fed's decision to raise interest rates can have a significant impact on the mortgage market. Higher interest rates generally lead to higher mortgage rates, making it more expensive for borrowers to buy homes or refinance existing mortgages. This, in turn, can slow down the housing market, affecting not just homebuyers, but also homebuilders, real estate agents, and related industries.

Mortgage rates have already started to increase, even before the Fed's recent comments. According to Freddie Mac, the average rate on a 30-year fixed mortgage rose to 3.02% in the week ending February 24, up from 2.81% at the beginning of the year. This increase is due to a combination of factors, including rising Treasury yields and increased demand for housing.

If the Fed continues to raise interest rates, mortgage rates are likely to rise further, making it more difficult for some borrowers to qualify for a mortgage or afford the monthly payments. This could result in a slowdown in the housing market, as potential buyers are priced out of the market.

What Borrowers Can Do

For borrowers who are in the market for a mortgage or considering refinancing an existing mortgage, there are a few things they can do to prepare for potential rate hikes:

Shop around: With mortgage rates on the rise, it's more important than ever to shop around for the best rate. Different lenders may offer different rates, so borrowers should compare offers from multiple lenders before making a decision.

Consider a shorter term: While a 30-year fixed mortgage may be the most popular option, borrowers may want to consider a shorter term, such as a 15-year fixed mortgage. Shorter-term mortgages generally have lower interest rates, which can save borrowers money over the life of the loan.

Improve credit score: Borrowers with higher credit scores generally qualify for lower interest rates. If a borrower's credit score needs improvement, they may want to work on paying down debt, making payments on time, and correcting any errors on their credit report.

Lock in the rate: Once a borrower has found a lender and a rate they're comfortable with, they can lock in the rate. This means that the lender guarantees the rate for a set period of time, usually 30-60 days, even if rates rise during that time.

The Bottom Line

Mortgages are one of the key areas that could be affected by the Fed's potential interest rate hikes. With borrowing costs already on the rise, many homeowners may find it increasingly difficult to afford their monthly mortgage payments if rates continue to climb.

The impact of rising rates on mortgages is not uniform across the market. Adjustable-rate mortgages, which are more sensitive to changes in interest rates, will be hit the hardest, as their monthly payments will increase in line with rising rates. Fixed-rate mortgages, on the other hand, offer borrowers more protection against rate hikes, as their monthly payments remain the same throughout the life of the loan.

Even so, rising rates could still have a significant impact on the housing market as a whole. Higher borrowing costs could dampen demand for homes, particularly among first-time buyers who may be more sensitive to changes in affordability. This could lead to a slowdown in home sales and a decline in home prices.

At the same time, rising rates could also impact the overall economy, as they make it more expensive for businesses and consumers to borrow money. This could lead to a slowdown in investment and spending, which could in turn lead to slower economic growth.

Despite the potential risks, many analysts argue that the Fed may have little choice but to continue raising rates in order to combat inflation. Inflation has been a persistent problem in the US economy, with prices rising at an annual rate of 6.4% in January. While some of this inflation is likely to be transitory, caused by pandemic-related supply chain disruptions and other factors, there are concerns that it could become more entrenched if left unchecked.

In this context, the Fed may feel compelled to take more aggressive action to curb inflation, even if that means risking a slowdown in economic growth or higher mortgage rates. For homeowners and other borrowers, the key will be to monitor interest rate movements closely and be prepared to adjust their budgets and financial plans accordingly.