It was one of those weeks where mortgage rates looked ready to ruin everyone’s mood… until they didn’t.
On Monday, rates were sitting at their highest levels in nearly a year, making borrowers collectively sigh into their coffee. Fast forward to Friday, though, and rates had managed to claw their way back to just a touch lower than they were the previous Friday. Not exactly a dramatic Hollywood comeback, but definitely enough to avoid the villain role. Here’s how the week unfolded.
News of additional U.S. air strikes in Iran sent fuel prices higher on Monday. And as we’ve seen for much of July, when oil, gas, and diesel decide to get expensive, mortgage rates usually aren’t far behind. Why? Because higher energy prices can fuel inflation, and bonds (which ultimately drive mortgage rates) have all the enthusiasm for inflation that cats have for bath time.
Coincidentally, Tuesday and Wednesday happened to feature two of the biggest inflation reports on the calendar: the Consumer Price Index (CPI) and the Producer Price Index (PPI). To make things even more interesting, Fed Governor Christopher Waller suggested the Fed might need to consider raising rates “in the near term” if inflation data came in hotter than expected.
Those comments packed a little extra punch because they were among the first meaningful pieces of forward guidance from a Fed official since Warsh took over. Warsh has made it clear he’d rather Fed officials keep future policy hints to a minimum, so Waller’s unusually direct remarks stood out. Markets took notice, quickly pushing expectations for another Fed rate hike to their highest level since the June Fed meeting.
Fortunately for borrowers, inflation had other plans.
Tuesday’s CPI report came in much cooler than economists expected. In fact, the core inflation reading missed forecasts by the widest margin in over a year, with several other inflation components also landing comfortably below expectations.
Wednesday followed with an encore performance. The Producer Price Index didn’t just come in lower than forecast—it showed a much larger decline than anyone anticipated. To top it off, the previous month’s numbers were revised sharply lower as well, leaving annual PPI a full 1.0% below what had originally been reported.
Markets wasted absolutely no time celebrating.
One of the clearest places to see the shift was in Fed Funds Futures, where traders bet on future Fed policy. Before Tuesday’s CPI report, markets were essentially expecting the Fed Funds Rate to finish the year just above 4%, implying that another rate hike was almost a sure thing. By the time Wednesday’s PPI report landed, those expectations had fallen to roughly 3.86%, effectively taking most of a 2026 rate hike off the table.
As we often point out, the Fed actually raising or cutting rates isn’t usually what moves mortgage rates. By the time those decisions happen, markets have already priced them in. What really matters are changing expectations—and this week those expectations shifted in a borrower-friendly direction.
Longer-term bonds, including 10-year Treasuries and mortgage-backed securities, rallied nicely after the inflation data. They didn’t move quite as dramatically as Fed Funds Futures, but they improved enough to bring the average top-tier 30-year fixed mortgage rate down by roughly one-eighth of a percent between Monday and Friday.
Looking ahead, next week’s economic calendar is surprisingly quiet. The Fed also enters its blackout period before its late-July meeting, meaning Fed officials will be keeping their microphones mostly turned off. That removes a couple of the usual sources of market drama, but don’t expect complete peace and quiet.
Geopolitical headlines—particularly anything affecting energy prices—still have the ability to shake both the bond market and mortgage rates. Large swings in the stock market could also spill over into bonds. A sharp stock sell-off could give rates another helping hand, while a strong stock rally might nudge them a bit higher.
For now, though, borrowers can appreciate a rare week where inflation decided to be the hero instead of the plot twist.