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The rebound in mortgage rates since last month’s Fed rate cut is weighing on homebuyer demand, and rates continue to rise as investors contemplate the prospect that renewed worries about inflation may lead the central bank to cut by only a hair in November — if at all.
After adjusting for seasonal factors, applications for purchase loans were essentially flat last week, falling by 0.1 percent when compared to the week before, according to a weekly survey of lenders by the Mortgage Bankers Association. Requests to refinance were down 9 percent week over week.
Mike Fratantoni
“In the wake of stronger economic data last week, including the September jobs report, mortgage rates moved higher, with the 30-year fixed rate rising to 6.36 percent – the highest since August,” MBA Chief Economist Mike Fratantoni said, in a statement.
“Conventional loan refinances, which tend to have larger balances than government loans and hence are more responsive for a given change in mortgage rates, fell to a greater extent over the week,” Fratantoni said. “Purchase application volume was little changed over the week and was 8 percent above last year’s level.”
In the lead-up to the Federal Reserve’s Sept. 18 rate cut, mortgage rates had come down by more than a percentage point from their 2024 high of 7.27 percent registered April 25. Bond market investors had priced in expectations that the Fed would cut short-term rates significantly this year and next to keep unemployment in check and head off a recession.
But since the Fed approved a dramatic 50 basis-point reduction in the short-term federal funds rate — the first rate cut in more than four years — long-term rates for mortgages and government debt have been climbing again.
Mortgage rates on the rise
Rates on 30-year fixed-rate loans had been flirting with 6 percent, hitting a 2024 low of 6.03 percent on Sept. 17, according to rate-lock data tracked by Optimal Blue.
But since then, mortgage rates have rebounded by more than a quarter percentage point, with Optimal Blue showing borrowers seeking 30-year fixed-rate loans were locking in rates averaging 6.37 percent Tuesday.
Optimal Blue data lags by a day, but yields on 10-year Treasury notes, a barometer for mortgage rates, rose Wednesday after minutes from last month’s Fed meeting showed some policymakers would have preferred to have started out with a smaller 25 basis-point rate cut.
Although a Fannie Mae survey showed consumer housing sentiment hitting a 30-month high in September, the survey was taken before the recent rebound in mortgage rates, and more than eight in 10 Americans still said it was a bad time to buy a home.
One reason mortgage rates have been on the rise is that in approving last month’s big rate cut, Fed policymakers also released an updated “dot plot” showing that they expected to bring rates down more slowly in the future.
That stance seems to have been justified by last week’s blowout jobs report, which sent mortgage rates soaring on estimates that employers added 254,000 workers to their payrolls in September and that unemployment declined for the second month in a row, to 4.1 percent.
While the strong job market raises hopes that the Fed will pull off a “soft landing” and avoid a recession as the economy cools, it also casts doubt on whether inflation has been vanquished.
Lorie Logan
Speaking at an energy conference in Texas Wednesday, Dallas Fed President Lorie Logan said last month’s rate cut “will help avoid cooling the labor market by more than is necessary to bring inflation back to target in a sustainable and timely way.”
Although “upside risks to inflation have diminished, they have not vanished,” Logan warned. “I continue to see a meaningful risk that inflation could get stuck above our 2 percent goal.”
In deciding how quickly to implement further rate cuts, Logan said Fed policymakers must grapple with the fact that the adjustments they make to the federal funds rate influence the economy only indirectly. Most consumers and businesses pay longer-term rates when they borrow that also reflect their creditworthiness.
“Financial conditions have eased notably from a year ago,” Logan said. “Mortgage rates have dropped, equity prices are near all-time highs, and credit spreads are near historic lows [but] an unwarranted further easing in financial conditions could boost spending and push aggregate demand out of balance with supply.”
There have also been structural changes in the economy, like artificial intelligence and the transition to renewable energy, that make it harder to determine the “neutral rate” — the level where interest rates don’t generate a headwind or a tailwind for the economy.
“In this uncertain environment, lowering the policy rate gradually would allow time to judge how restrictive monetary policy may or may not be and reduce the risk of inadvertently boosting inflation by bringing the policy rate below its neutral level,” Logan said.
Federal funds rate
To fight inflation, the Federal Reserve raised the short-term federal funds rate 11 times between March 2022 and July 2023, to a target of between 5.25 percent and 5.50 percent — the highest level since 2001.
Last month’s “dot plot” showed Fed policymakers envisioned bringing the federal funds rate down by a total of two percentage points this year and next. That could entail making 25 basis-point cuts in both November and December, followed by several rate cuts totaling 1 percentage point in 2025.
Futures markets tracked by the CME FedWatch tool show investors have ruled out the possibility of another 50 basis-point rate cut at the Fed’s Nov. 7 meeting.
While futures markets show investors think there’s a 76 percent chance of a 25-basis point rate cut next month, there’s growing sentiment that the central bank might even leave rates where they are, for now.
The CME FedWatch tool shows interest rate traders pricing in a 24 percent chance on Wednesday that the Fed will maintain its current target for the federal funds rate at 4.75 percent to 5.0 percent. That’s up from 15 percent on Tuesday and 0 percent last week.
Upcoming data releases
For those keeping a close eye on mortgage rates, two important data releases are set to come out Thursday: the September Consumer Price Index (CPI), and weekly initial jobless claims.
Rising costs for shelter, airline fares, auto insurance, education and apparel drove a surprisingly large increase in the most recent core CPI reading. Core CPI, which excludes volatile food and energy prices, was up 3.26 percent from a year ago in August.
The latest personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred measure of inflation, showed the prices of goods and services rose by 2.2 percent in August from a year ago, closer to the Fed’s goal.
Logan pointed to yet another measure, the Dallas Fed Trimmed Mean PCE inflation rate, which excludes high and low outliers and fell to 2.67 percent in August.
Forecasters at Pantheon Macroeconomics think that the full impact of higher rates in slowing the economy is taking time to show up in the data and that the Fed will soon have to bring rates down dramatically to keep unemployment in check.
Samuel Tombs
September’s CPI report “probably will reignite doubts that inflation will return quite quickly to the 2 percent target,” Pantheon economists Samuel Tombs and Oliver Allen said in their Oct. 8 U.S. Economic Monitor. “Nonetheless, September’s data will merely represent a hiccup in the favorable disinflation trend. By year-end, the Fed will be much more focussed on the risk of excessive labor market weakness than sticky inflation.”
Pantheon’s latest forecast envisions that the Fed will cut rates by 25 basis points in November, and then “a soft run of jobs and activity data in Q4 and Q1 will soon have the Fed scrambling to avoid falling behind the curve.”
If the central bank cuts rates by 50 basis points in December and by 1.5 percentage points in the first half of 2025, as Pantheon forecasts, that would bring the Fed funds target rate to between 2.50 percent and 2.75 percent by June.
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