Federal Open Market Committee participants in December shared a consensus that interest rates will certainly rise in 2016, according to CoreLogic's Frank Nothaft. The median increase in the target rate given expectations in the performance of the economy for 2016 is 100 basis points, with the smallest expected increase being 50 basis points.
The assessment also showed a 100 basis point increase in the target rate for the 2017 calendar year, and a similar increase was projected for 2018. There is an expected return to the longer-run equilibrium steady state rate of 3.5%, which would be the highest federal funds rate since January 2008.
So what does all of this mean for mortgage rates? Mortgage rates will increase, but not by as much as the federal funds rate, which will lead to a flattening of the yield curve. Long-term, fixed mortgage rates should rise less in the near term partly because the Federal Reserve will be buying mortgage-backed securities to offset pay downs in its MBS portfolio. This demand will bolster MBS prices, mitigating upward pressure on mortgage rates. Interest rates on adjustable-rate mortgages will likely see an effect sooner because they are indexed to short-term interest rates. In particular, interest rates on home equity lines of credit (HELOCs) are often tied to a bank prime, which typically moves in lockstep with the federal funds rate.