Mortgage Rates Head Back Over 7% After Powell Testimony

Jerome Powell is chairman of the Federal Reserve—the institution that sets lending rates overnight in an effort to keep inflation in a low, stable range. Inflation has been low and stable recently, so the Fed raised rates overnight at the fastest pace in 40 years.

Mortgage rates also rose at the fastest pace in 40 years, but they are not directly directed by the Fed. Rather, the Fed’s direct influence on overnight rates spills over into the rest of the rate market. The longer the length of a given lending term, the closer the interest rate is tied to the fed funds rate.

Furthermore, the market continually adjusts expectations for the fed funds rate while the Fed only officially hikes/cuts 8 times a year. When the Fed meets again in 2 weeks, they will almost certainly raise rates again. The only question is “how much?”

Markets held on to their expectations of a 0.25% hike, which is seen as the minimum increment for a rate change by the Fed. With some recent data indicating much greater economic resilience and persistent inflationary pressures, calls for a 0.50% hike have increased.

In scheduled testimony before the Senate Banking Committee today, Fed Chair Powell stopped short of specifying a number for the next rate hike, but commented on the need to make the hike qualitatively/more than previously expected. As a result the markets raised the odds for a bigger upside in 2 weeks as well as a higher range expected by the end of 2023.

Again, the fed funds rate does not directly determine mortgage rates, but there was some spillover as market expectations shifted in the direction of a “longer high”. The average mortgage lender yield for the top tier conventional corresponding to the 30-year fixed scenario was already close to 7%, and today’s weakness was enough to officially push us into the low 7%.

As Powell reminded senators, the Fed will base its decisions on data, and there is significant data to come between now and Fed Day. It’s a double-edged sword because strong data can send rates higher just as easily as weak data can help us get back below 7%.

Friday’s jobs report and next Tuesday’s consumer price index (CPI) are the reports with the greatest potential for volatility (for better or worse).