Mortgage Rates Increased This Week Ahead Of A Less Dovish Federal Reserve Outlook

Mortgage rates increased this week ahead of the Federal Reserve’s interest rate decision as investors came to grips with a more hawkish Federal Open Market Committee (FOMC), less disinflation and the federal funds rate remaining high for longer.

As expected, the committee decided to leave the target for the federal funds rate unchanged. However, the committee also pointed to the lack of further progress in bringing inflation down to the Fed’s two-percent target. Stubborn inflation will likely keep Treasury yields and mortgage rates elevated while providing no relief from the heightened rate volatility of the past couple of years.

During his press conference, Fed Chair Powell clarified that it will not be appropriate to reduce the federal funds rate until inflation is firmly returning to the two-percent target, acknowledging that this effort will likely take much longer than previously expected. Although Fed policy is restrictive and weighing on the labor and housing markets, the Fed chair may have hinted at greater uncertainty about whether policy is “sufficiently” restrictive to return inflation to two percent.

Despite the lack of progress on inflation, the Fed’s decision to slow the pace of decline of its securities holdings helped to pull Treasury yields — which mortgage rates tend to follow — lower. While there is no guarantee that mortgage rates will move lower, it does at least mean less upward pressure.

Expect more rate volatility ahead as the Fed and investors wait for more conclusive evidence of a return to low, stable and more predictable inflation. This week’s labor costs and employment data releases will likely cause more repricing activity.