Mortgage rates continue to rise with economic strength

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A rise in mortgage rates since the Fed's rate cut last month is weighing on homebuyer demand, and rates continue to rise as investors consider the prospect that renewed concerns about inflation could lead to just one haircut by the central bank in November.

After adjusting for seasonal factors, applications for purchase loans were essentially flat last week, down 0.1 percent from the previous week, according to the Mortgage Bankers Association's weekly survey of lenders. Refinancing requests fell 9 percent for the week.

Mike Fratantoni

“Following stronger economic data last week, including the September jobs report, mortgage rates rose, with the 30-year fixed rate rising to 6.36 percent — the highest since August,” said Mike Fratantoni, chief economist at MBA.

“Conventional loan refinances, which have larger balances than government loans and are therefore more responsive to changes in mortgage rates, declined more during the week,” Fratantoni said. “The volume of purchase requests was little changed during the week and was 8 percent above last year's level.”

Ahead of the Federal Reserve's Sept. 18 rate cut, mortgage rates fell more than a percentage point from their 2024 high of 7.27 percent set on April 25. Bond market investors had priced in expectations that the Fed would taper. -This year and next period rates will significantly keep unemployment under control and decline.

But after the Fed approved a dramatic 50 basis point cut in the short-term federal funds rate — the first rate cut in more than four years — long-term interest rates on mortgages and government debt began to rise again.

Mortgage rates are rising

Interest rates on 30-year fixed-rate loans have been flirting with 6 percent and hit a 2024 low of 6.03 percent on Sept. 17.

But since then, mortgage rates have risen more than a quarter of a percentage point, with Optimal Blue showing borrowers seeking 30-year fixed-rate loans locked in an average rate of 6.37 percent on Tuesday.

Optimum Blue data is a day late, but a barometer for mortgage rates rose on Wednesday after last month's Fed meeting indicated some policymakers preferred to start with a smaller 25 basis point rate cut.

Although the Fannie Mae survey showed consumer housing sentiment rose to 1, the survey was taken before the recent rise in mortgage rates, and more than eight in 10 Americans say it's still a bad time to buy a home.

One reason mortgage rates are rising is that Fed policymakers signaled they expect to cut rates more slowly in the future when they approved last month's big rate cut.

That stance appeared to be justified last week by rising mortgage rates on estimates that employers added 254,000 workers to their payrolls in September and that the unemployment rate fell for a second straight month to 4.1 percent.

While the strong job market raised hopes that the Fed will do a “soft landing” and avoid recession as the economy cools, it also casts doubt on whether inflation has been defeated.

Lori Logan

Speaking at an energy conference in Texas on Tuesday, the Dallas Fed president said last month's rate cut “will help prevent the labor market from cooling further than necessary to get inflation back to target in a sustained and timely manner.”

“While the upside risks to inflation have receded, they have not disappeared,” Logan warned. “I continue to see a meaningful risk that inflation could remain above our 2 percent target.”

In deciding how soon to cut rates further, Logan said Fed policymakers must contend with the fact that adjustments to the federal funds rate only have an indirect effect on the economy. Most consumers and businesses pay longer-term rates when they borrow, which reflects their creditworthiness.

“Financial conditions have eased significantly compared to a year ago,” Logan said. “Mortgage rates are down, stock prices are at all-time highs and credit spreads are near historic lows (but) further easing in financial conditions could raise costs and throw aggregate demand out of balance with supply.”

There have also been structural changes in the economy, such as artificial intelligence and the transition to renewable energy, making it difficult to define the “neutral rate”—the level at which interest rates do not create a headwind or tailwind for the economy.

“In this uncertain environment, a gradual lowering of the policy rate will give time to judge how restrictive monetary policy may or may not be and reduce the risk of an accidental rise in inflation by lowering the policy rate below neutral,” he said.

Federal funds rate

To combat inflation, the Federal Reserve raised the short-term federal funds rate 11 times from March 2022 to July 2023, to a target of between 5.25 percent and 5.50 percent.

Last month's “point plan” showed Fed policymakers intended to cut the federal funds rate by just two percentage points this year and next. This could result in several rate cuts of 25 basis points in both November and December, followed by just 1 percentage point in 2025.

Futures markets, watched by show investors, ruled out the possibility of another 50 basis points reduction at the November 7 Fed meeting.

While futures markets show investors think there is a 76 percent chance of a 25 basis point rate cut next month, there is growing sentiment that the central bank may leave rates where they are for now.

The CME FedWatch tool on Wednesday rates interest rate traders at a 24 percent chance the Fed will keep its current target for federal funds at 4.75 percent to 5.0 percent. That was 15 percent on Tuesday and 0 percent last week.

Future data releases

For those watching mortgage rates closely, two important data will be released on Thursday: September's Consumer Price Index (CPI) and weekly initial jobless claims.

Rising costs for shelter, airline fares, car insurance, education and clothing led to a surprisingly large increase in the latest core CPI reading. Core CPI, which excludes volatile food and energy prices, rose in August from a year earlier.

The latest personal consumption expenditures (PCE) price index, the Federal Reserve's measure of inflation, showed that prices of goods and services rose from a year ago, nearing the Fed's target.

Logan pointed to another measure that excludes high and low outliers and fell to 2.67 percent in August.

Forecasters at Pantheon Macroeconomics believe it will take time for the full impact of higher rates to slow the economy to show up in the data, and the Fed will soon need to cut rates sharply to keep unemployment under control.

Tombs of Samuel

The September CPI report “is likely to reignite doubts that inflation will return to the 2 percent target fairly soon,” Pantheon economists Samuel Tombs and Oliver Allen said in the Oct. 8 US Economic Monitor. “However, the September data will only be a hiccup in the favorable inflation trend. Until the end of the year, the Fed will focus more on the risk of a weakening labor market than on sticky inflation.

Pantheon's latest forecast predicts the Fed will cut interest rates by 25 basis points in November, and then “soft jobs and activity data in the 4th and 1st quarters will soon push the Fed to avoid falling behind the curve.”

If the central bank were to cut interest rates by 50 basis points in December and 1.5 percentage points in the first half of 2025, as Pantheon predicts, that would push the Fed funds rate target to between 2.50 percent and 2.75 percent by June.

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