In a bold move Wednesday afternoon, the Federal Reserve raised the federal funds rate by 75 basis points. As recently as mid-May, Fed Chair Jerome Powell had signaled a 50-point increase, but following unexpectedly high inflation numbers from the Bureau of Labor Statistics, as well as geopolitical turmoil and the ongoing effects of the pandemic, the Fed acted more decisively in an attempt to rein in inflation.

A basis point is equal to one one-hundredth of one percent, so 75 basis points equal 0.75%. Following today's move, this target interest rate sits at a range of 1.50% to 1.75%.

Meanwhile, mortgage interest rates — which had already grown by more than 2 percentage points in 2022 in anticipation of the Federal Reserve's projected moves — have headed even higher, with some lenders advertising 30-year fixed rates above 6%. Rising mortgage rates have added even more pressure to home buyers already facing a brutal housing market.

Why we’re talking about the funds rate

The federal funds rate determines what banks charge each other to borrow money. It doesn't directly alter most prices or consumer interest rates. But when the funds rate increases and it costs banks more to borrow money, borrowing usually gets more expensive for businesses and consumers, too. This can slow down hiring and weaken demand for consumer goods. Raising the funds rate is one tool the Federal Reserve uses to try to slow inflation.

So far this year, increases to the funds rate have been more cautious. Keeping inflation at approximately 2% is one of the Fed's core goals, but the central bankers initially predicted that high inflation would be short-lived.

"After shifting from the view that inflation was transitory, the Fed had to move fast to 'get ahead of the curve,'" Michael Neal, a principal research associate at the Urban Institute, said in an email.

The Federal Reserve started with a 25-basis-point increase back in March. In May, the Fed went with a 50-basis-point increase, then the single highest increase in 22 years. A second 50-point increase was expected for June, but mixed economic signals put pressure on the central bankers. While hiring remains strong and unemployment is stable, inflation hit a 40-year high of 8.6% in May and consumer confidence is already shaken. That put today's 75-point hike — the largest in 28 years — on the table.

Mortgage rates continue to rise

Mortgage interest rates have consistently risen ahead of this year's Federal Reserve meetings, and this week was no exception. After hitting a record low in 2020 and staying around 3% throughout 2021, mortgage rates rose to 4% in March 2022 and crossed the 5% threshold in April. Interest rates for 30-year fixed mortgages are now higher than they've been in 10 years, and this week saw some lenders publishing 30-year rates above 6%.

Mortgage lenders had prepared for two shifts: the expected 50-point increases and the Federal Reserve tapering its purchases of mortgage-backed securities, another strategy that helped keep interest rates down in 2020 and 2021.

"Mortgage rates have already priced in the Fed's tightening policy," Nadia Evangelou, senior economist and director of forecasting for the National Association of Realtors said in an email.

Robert Frick, a corporate economist with Navy Federal Credit Union, said in an email that, "The Fed’s reducing its stockpile [of] treasuries and mortgage-backed securities may influence long-term rates eventually, but probably not this year."

This week's 6% interest rates could be a knee-jerk reaction to turmoil in the markets and the Fed's unexpected 75-point hike. But mortgage rates keep blasting past expert predictions this year, so higher rates may be here to stay.

Still no relief for home buyers

Though mortgage interest rates have risen dramatically, major changes in the housing market are unlikely.

"Housing market demand is slowing in light of higher mortgage rates, however, that’s from some of the most overheated conditions that we’ve seen since the onset of the pandemic," Selma Hepp, deputy chief economist for CoreLogic, said in an email.

Rather than cooling off, Hepp suggests that the market is "normalizing." Home values may not be appreciating at the exaggerated pace we've seen over the past couple of years, but homeowners don't need to worry their equity will evaporate.