If you've been keeping an eye on mortgage rates, you might be wondering why they're at long-term highs, even though the Federal Reserve didn't raise interest rates this week. Let's break it down in simple terms.
What are the Fed vs. Bond Markets?
The Federal Reserve, or "the Fed," has scheduled meetings where they decide whether to change interest rates. But here's the thing: the bond market, where loans like mortgages are traded, operates daily and reacts to various factors. Sometimes, the bond market has already priced in what the Fed might do, so a Fed rate hike isn't a surprise.
Traders in the bond market use tools like Fed Funds Futures to predict where interest rates are headed. They've been expecting no change in rates for months. So when the Fed decided to keep rates steady recently, it wasn't a shock to anyone. This means we need to look elsewhere for the cause of mortgage rate volatility.
What is the Dot Plot?
During some of the Fed's meetings, they release a "summary of economic projections," which includes a dot plot showing where each Fed member thinks interest rates will be in the coming years. These dots indicate the Fed's future rate intentions.
This time, the market wasn't happy with the dot plot. It showed that the Fed expects rates to be higher for longer than previously thought. The market had already been pricing in a "higher for longer" path for interest rates based on recent economic data, and the dot plot added to those expectations.
Is Inflation Keeping Rates High?
The Fed uses interest rates to combat inflation. While inflation has come down somewhat, it's still relatively high. Factors like rising fuel prices, auto worker strikes, and changes in healthcare cost calculations could cause inflation to rebound. The Fed also hasn't seen the economic downturn that usually leads to lower inflation.
Will Rates Drop in October?
The timing of a policy shift is a subject of debate. Some believe the Fed should wait, while others think it's time for a change. Regardless, both the Fed and the market are watching key economic reports, especially those coming in early October. If the data takes a negative turn, rates could drop, but if it continues to surprise on the upside, rates may rise further.
So while the Fed didn't raise rates, mortgage rates are at long-term highs due to the market's reaction to the Fed's expectations and concerns about inflation. The timing of any rate changes will depend on economic data in the coming months. So, if you're in the market for a mortgage, find the best mortgage lender and be prepared for potential rate fluctuations.
