Could mortgage rates hit 10 percent?

The last time “core” inflation — an odd price benchmark that's carefully tracked by the Federal Reserve — was as high as it is today, mortgage rates were nearly 10%.

My trusty spreadsheet looked at the historic ties between mortgages (Freddie Mac's 30year average rate) and the “sticky inflation” measurement by the Atlanta Fed.

This cost-of-living yardstick excludes volatile inflation factors such as food and energy and instead focuses on slow-to-change spending categories. (Yes, this concept of “core” inflation seems insulting to anybody who tries to meet a household budget, but it's a Fed favorite so it must be watched.)

The trend

The pandemic era's economic bailout by the Fed is over.

This was the message sent Wednesday when the central bank raised its benchmark rate by three-quarters of a percentage point, its largest hike since 1994.

The previous cheap money policies, designed to help the economy escape a coronavirus chill, kept rates too low for too long. Those stimulus tactics overheated demand and prices of numerous goods and services — notably housing.

The last time sticky inflation was above 5% it was May 1991 and mortgage rates ran 9.47%. Borrowers were paying a 4.22 percentage-point “premium” above a 5.25% annualized gain in sticky inflation.

In May 2022, that cost-of-living metric was surging by 4.98%, yet the month averaged 5.23% mortgage rates. That's only a 0.25-point premium.

It sounds like today's borrowers may still be getting a relative bargain, even after this year's jump in rates.

The dissection

The nation was in an economic funk in the spring of 1991 when “core” inflation was last this hot.

Iraq's invasion of Kuwait in the summer of 1990 pushed oil prices skyward. Those costs helped nudge the U.S. economy into a brief and mild recession that ended in March 1991 — just as the first Gulf War that liberated Kuwait ended swiftly.

May 1991's U.S. unemployment rate was 6.9% — up from 5.4% a year earlier — and nationwide spending, after inflation, was falling at a 0.4% annual pace. Meanwhile, nationwide home prices had fallen 1% in a year.

Contrast that snapshot to this spring, where the economy's story is “too much good stuff” — joblessness is down to 3.6% from 5.8%, and spending is running 8.5% higher, after inflation. Not to mention, home prices are 19% above the previous year.

Remember, inflation is a key part of the rate-setting process. Lenders want to make sure that

The Federal Reserve is stepping up its war on inflation. That means borrowing costs are going sharply higher for families and businesses.

The U.S. central bank increased its benchmark interest rate by three-quarters of a percentage point Wednesday, which is the biggest single hike since 1994. That follows the Fed's decision to raise its rate by half a percentage point in May, the biggest increase in 22 years.

Chairman Jerome Powell hopes that by making borrowing more expensive, the Fed will succeed in cooling demand for homes, cars and other goods and services and will slow inflation — without doing too much harm to the job market.

The fact that the Fed is moving decisively shows confidence

Big increases underscore Fed's growing concern about the soaring cost of living

in the hiring pace. But the speed with which interest rates are expected to go up underscores its growing concern about the soaring cost of living.

Consumer prices rose in May at the fastest pace in 40 years, but unemployment is currently close to a 50-year low. The U.S. economy no longer needs help from the Fed.

What does that mean?

Q A

How high might rates go?

Investors are expecting the Fed will raise the high end of its target range to at least 3.75% by the end of the year, up from 1% today.

For context, the Fed raised rates to 2.37% during the peak of the last rate-hiking cycle in late 2018. Before the Great Recession of 2007-2009, Fed rates got as high as 5.25%.

And in the 1980s, the Paul Volcker-led Fed jacked up interest rates to unprecedented levels to fight runaway inflation. By the peak in July 1981, the effective Fed funds rate topped 22%. (Borrowing costs now won't be anywhere near those levels, and there is little expectation that they will go up that sharply.)

Still, the impact to borrowing costs in coming months will depend chiefly on the — as yet undetermined — pace of the Fed's rate hikes.

Q

Is this good news for savers?

ARock-bottom rates have penalized savers. Money stashed in savings, certificates of deposit and money market accounts earned almost nothing during COVID-19 (and for much of the past 14 years, for that matter). Measured against inflation, savers have lost money.

The good news, however, is that these savings rates will rise as the Fed moves interest rates higher. Savers will start to earn interest again.

But this takes time to play out. Large banks have been flooded with savings as a result of government financial aid and reduced spending by many wealthier Americans during the pandemic. They won't need to raise savings rates to attract more deposits or CD buyers.

But online banks and oth