The Fed's First Hike Since 2023 Has Reached Private Lenders' Cost of Capital

The Federal Reserve raised its benchmark rate on Sept. 16 for the first time since July 2023. The Federal Open Market Committee voted 12-0 to lift the target range for the federal funds rate by a quarter point, to 3.75% to 4%.

"Inflation remains elevated," the committee said in its statement. "Today's policy action will support a timelier return to the Committee's 2 percent goal." Fed Chair Kevin Warsh told reporters that "inflation is too high and has been for too long," according to Kiplinger's coverage of the press conference. Officials' projections pointed to one more increase before the end of the year.

For private lenders, the decision matters less for its size than for where it lands: on the credit lines that fund loans, on the yields investors expect and on the refinance exits that bridge and fix-and-flip borrowers depend on.

What moved

Benchmark	Before	Latest
Fed funds target (upper bound)	3.75%	4.00%
Prime rate	6.75%	7.00%
10-year Treasury yield	4.79% (Sept. 1)	5.29% (Sept. 30)
2-year Treasury yield	4.39% (Sept. 1)	4.88% (Sept. 30)
30-year fixed mortgage, Freddie Mac	6.95% (Sept. 17)	7.03% (Sept. 24)

Wells Fargo and Bank of America raised their prime rates to 7% effective Sept. 17, the day after the decision, WFAE reported. Prime is conventionally set 3 percentage points above the top of the fed funds range.

Longer-term rates have moved further than the Fed did. The 10-year Treasury yield rose about half a percentage point during September, according to Treasury Department data, and reached 5.01% on the day of the decision. Freddie Mac's weekly survey put the average 30-year fixed mortgage rate at 7.03% on Sept. 24, up from 6.30% a year earlier.

Where private lenders will feel it

Credit lines reprice first. Bank lines and warehouse facilities are commonly priced at a spread over prime or SOFR. When those benchmarks move, a lender's borrowing cost moves with them, often at the next interest period. Lenders that did not raise their own note rates will see that spread squeezed.

Investors will ask for more. Fund investors and note buyers compare private-loan yields with what they can earn on Treasuries. With the 2-year yield near 4.9%, the gap that private notes must clear to look attractive has narrowed. That puts upward pressure on the rates lenders need to charge.

Refinance exits get tighter. Many bridge and rehab loans are underwritten with a takeout into a long-term rental loan, such as a DSCR loan. Those loans are sized off the rent a property produces and the rate at the time of refinance. If rates rise while the bridge loan is outstanding, the borrower may qualify for a smaller takeout than planned.

A simple illustration: for a rental property with $100,000 of annual net operating income, underwritten at a 1.25 debt service coverage ratio on a 30-year amortizing loan, the maximum loan is about $1.00 million at a 7% rate, about $953,000 at 7.5% and about $909,000 at 8%. Each half-point rise cuts roughly 5% from the loan amount. A borrower counting on a cash-out at the end of a project may need to bring cash instead, or ask for an extension.

What to watch

The Fed's next scheduled meetings are Oct. 27–28 and Dec. 8–9. Lenders with loans maturing in the next two quarters may want to review which borrowers depend on a refinance to repay, and how much room those deals have if long-term rates stay near current levels.