Mortgage Rate Watch: What Comes After the Fed Hike?

The Federal Reserve raised its benchmark interest rate last week, but the more important question for mortgage borrowers is what happens next.

The Fed unanimously approved a quarter-percentage-point increase on September 16, moving its federal funds target range to 3.75%–4.00%. Fed Chair Kevin Warsh said inflation remains too high and that underlying inflation trends have not improved enough.

That message leaves the door open to additional increases. However, it is important to understand that the Federal Reserve does not directly set mortgage rates.

Why Mortgage Rates Can Move Before the Fed Acts

Mortgage rates are heavily influenced by the bond market, including Treasury yields and mortgage-backed securities. Investors constantly adjust prices based on what they believe inflation, economic growth and Federal Reserve policy will look like in the future.

Because last week’s Fed increase was widely expected, much of the anticipated move had already been incorporated into mortgage pricing.

That is why an increase in the federal funds rate does not necessarily produce an equal increase in mortgage rates on announcement day. Sometimes mortgage rates can even improve following a Fed increase if investors believe the central bank’s action will successfully reduce future inflation.

This time, however, the Fed’s message suggested that policymakers may not be finished.

Mortgage Rates Enter the Week Near Recent Highs

Freddie Mac reported that the average 30-year fixed mortgage rate reached 6.95% as of September 17, up from 6.76% one week earlier. The average 15-year fixed rate increased to 6.26%.

These are national survey averages, not individual quotes. A borrower’s actual rate depends on factors including credit, down payment, property type, loan program and market conditions at the time of locking.

The 10-year Treasury yield also approached 5% last week before easing toward 4.95% Monday morning. Lower oil prices provided some early-week relief, but inflation and government borrowing remain significant concerns for longer-term rates.

Fed Speakers Could Set the Tone

With fewer major economic reports scheduled, comments from Federal Reserve officials may receive more attention than usual.

Several policymakers are scheduled to speak this week. Investors will listen for answers to three questions:

• Do officials believe another increase will be necessary?
• What would convince the Fed to pause?
• Is inflation being driven mainly by temporary disruptions, or is strong demand creating broader price pressure?

If officials consistently argue that inflation requires additional action, Treasury yields and mortgage rates could remain elevated. A more cautious or divided message could help the market settle.

Business Activity Arrives Wednesday

Wednesday’s S&P Global reports will provide an early look at September activity across manufacturing and services.

Economists expect manufacturing activity to improve slightly while services activity slows modestly. Markets will pay particular attention to business costs and prices charged to customers.

Strong growth is generally positive for the economy. In the current environment, however, strong growth accompanied by higher prices may make the Fed more comfortable raising rates again.

Housing and Employment Data Arrive Thursday

Weekly unemployment claims and August new-home sales are scheduled for Thursday.

Claims are expected to remain low, indicating that employers are still reluctant to reduce staffing. New-home sales are forecast to improve modestly from July.

Housing activity has already been affected by higher borrowing costs. Builders are increasingly using incentives and price reductions to attract buyers, but mortgage rates remain an important affordability constraint.

Consumer Inflation Expectations Matter Friday

Friday brings Durable Goods Orders and the final September University of Michigan consumer survey.

Consumer sentiment weakened sharply in the preliminary survey, while one-year inflation expectations rose to 4.6%. That inflation figure could be particularly important for the bond market.

When consumers expect higher prices, those expectations can affect spending, wages and business pricing decisions. The Fed watches these measures because rising expectations can make inflation harder to bring under control.

What This Means for Buyers and Homeowners

This week is less about one blockbuster report and more about whether the market becomes convinced that additional Fed increases are coming.

For mortgage rates, softer business activity, signs of labor-market cooling and lower inflation expectations would be the most favorable combination. Resilient growth and persistent price pressure could keep rates elevated.

Anyone planning to purchase, refinance or lock a rate should focus on the payment and strategy that fit their situation. Trying to perfectly predict the next market move is difficult, especially when rates are reacting to new information throughout the day.

A good rate-lock plan should account for both the potential benefit of improvement and the financial risk of waiting.

Let us know if you have any questions.