It’s a familiar theme around here: The Fed does not directly set mortgage rates. In fact, mortgage rates and the Fed can sometimes go in completely opposite directions in the short term—because apparently, financial markets enjoy making things unnecessarily confusing.
Mortgage rates were already climbing above 7% last week as oil prices pushed past $100 per barrel and diesel prices at the pump reached record highs. Inflation data also made a Fed rate hike more likely this week, adding even more upward pressure to mortgage rates.
This is one of the biggest ways the Fed Funds Rate influences longer-term rates like mortgages. Financial markets usually anticipate what the Fed is going to do well before the actual announcement. By the time the Fed gets around to making its decision, mortgage rates have often already priced it in and are waiting for the next piece of information.
Unfortunately, the Fed provided plenty of new information on Wednesday.
The actual rate hike barely made a dent in the bond market. Bonds hardly moved when the decision was announced at 2pm ET. Rates didn’t really start moving higher until Fed Chair Kevin Warsh began his press conference about 30 minutes later.
So, what happened?
Simply put, Warsh strongly suggested that additional rate hikes could be on the way. He described Wednesday’s hike as “removing some accommodation.” In Fed-speak, when policy is described as accommodative, it means the current Fed Funds Rate is doing more to encourage economic growth and inflation than to slow them down.
By saying that only “some” accommodation had been removed, Warsh was essentially leaving the door wide open for more hikes in the near future.
And he didn’t stop there.
Warsh also pointed out that inflation trends had not improved, the economy had strengthened and the geopolitical situation had deteriorated. Put those three things together, and the case for additional rate hikes becomes considerably stronger.
As we mentioned last week, there had been signs that longer-term rates were looking for reassurance that the Fed remained serious about fighting inflation. Wednesday’s rate hike and press conference provided that reassurance—and then some.
The result was plenty of volatility on Wednesday, but mortgage rates managed to recover almost all the way back to the week’s best levels by Thursday. Overall, this week was considerably calmer and more sideways than last week.
The underlying bond market weakened again on Friday, although the reason may have been somewhat unrelated to the week’s main storyline. One possibility involved the foreign-exchange market, specifically Japan selling U.S. Treasuries to support the value of its currency.
Whatever the cause, the average mortgage lender didn’t suffer too much damage. In other words, Friday brought a little drama, but thankfully not the kind that requires popcorn.
Looking ahead, the coming week doesn’t offer much in the way of major economic data, despite having a fairly busy calendar. With fewer major reports to move the market, oil price volatility could be just as important as anything else when it comes to setting the tone for day-to-day mortgage rate movements.