Will the Fed raise interest rates despite bank problems? What you need to know

If you’re looking to buy a house, or buy anything requiring borrowing, you may as well do it now. Interest rates are poised to go higher soon.

As long as the cost of living keeps going up at a pace unseen since the 1980s, the Federal Reserve was expected to keep pushing up rates. The next increase is expected when it meets Tuesday and Wednesday.

There is a wild card, though, that could keep rates steady: The sudden concern about health of the nation’s banking system.

“We don’t know how things are going to go,” said Jacob Channel, senior economist at LendingTree, which tracks interest rates.

“If you’re really actively looking to buy a house, locking in a rate could make sense, though I’m not gonna say it’s necessary,” he said.

Most analysts expect Fed Chairman Jay Powell to boost its key rate another one-fourth of 1 percentage point. That would push that rate to its highest level in about 16 years, and is likely to affect rates for almost every kind of borrowing.

“The Fed is really laser focused on inflation, and 6% is still three times higher than where they want it to be,” said Jordan Levine, California Association of Realtors vice president and chief economist..

The cost of living was up 6% in the 12 months ending in February, the federal Bureau of Labor Statistics reported last week. The Fed is aiming to bring that figure down to 2%.

The big unknown in the interest rate scenario is the sudden shaky confidence in the banking system. Mortgage rates dropped somewhat last week after the collapse of California’s Silicon Valley Bank, partly because of a sense the Fed may ease up on the interest rate hikes in order to keep the economy and the banking industry healthier.

California mortgage rates

Thirty-year fixed rate mortgage interest rates averaged 6.6% last week, Freddie Mac reported. That’s far above the 4.16% a year earlier, but slightly below the fall 2022 peak of 7.08%.

Rates in the Sacramento area Friday for a 30-year fixed rate mortgage, with a 20% down payment, ranged from 5.835% to 7.257%, BankRate reported.

The lower interest rates have helped spur home sales in California. February single-family home sales statewide were up 17.6% from January, though still well below sales of a year ago, the Realtors Association reported. Sacramento-area home sales rose 27.1%.

In addition to lower interest rates, home prices also were down. The state’s median home price dropped for the sixth consecutive month to $735,480. A year earlier, the median was $772,180.

The Sacramento median in February was $499,000, down from $541,500 a year ago.

Levine and others saw interest rates bouncing back to the 7% level soon.

“Rates have come down in light of the Silicon Valley Bank issue but I think, given what the inflation numbers showed, I think that’s going to be short lived. I wouldn’t be surprised to see the rate back to 7%,” Levine said.

“I do think sometimes we can get too caught up in the doom and gloom. Despite headwinds I do see improvements” in the economy, Channel said.

But as Mark Schniepp, director of the California Economic Forecast in Santa Barbara, put it:

“It depends on how the Fed interprets the Silicon Valley Bank problem. Was it relatively unique, or is it the canary in the coal mine?”

Like others, he expects a slight rate increase this week. And while he expects some small increases later this year, if the banking situation worsens, “they may not want to raise rates further, knowing they could exacerbate the avalanche of dominoes.”