Renewed energy pressures and a hawkish Fed may lead the central bank to raise rates
With the Fed meeting arriving against a backdrop of renewed energy price pressure, elevated inflation expectations, and a more hawkish tone from policymakers, most analysts expect the central bank to once again hold rates when it announces its rate decision at 2 p.m. ET on Wednesday.
While 10-year Treasury yields were down slightly on Monday, they have risen sharply in recent weeks, pushing the 30-year fixed mortgage rate to 11-month highs. Freddie Mac reported its 30-year rate at 6.58% on Thursday, while the latest number from the Mortgage Bankers Association last week was 6.69%.
Combine all the data with renewed pressure from the White House, and it sets the stage for an interesting central bank meeting.
While the Federal Reserve is widely expected to hold rates steady at its meeting Wednesday, at least one senior economist is not ready to count out the possibility of a hike entirely.
Sam Williamson (pictured top), senior economist at First American, said the risks that could lead to a rate increase are getting harder to ignore.
"A hold remains the most likely outcome at the July meeting, but a hike is not completely off the table," Williamson told Mortgage Professional America. "Rising inflation expectations, renewed energy pressures and a more hawkish Fed have made that risk harder to ignore. If the Fed holds, the question becomes how much the balance of risks has shifted toward fighting inflation, a signal that could raise the odds of rate hikes later this year."
Judging Warsh’s tone
Melissa Cohn, regional vice president of William Raveis Mortgage and a 44-year mortgage veteran, said she is watching Warsh's tone as closely as the decision itself, assuming he continues to hold post-decision press conferences.
"We all, in our hearts, pray that we hear something from the Fed saying that it's found a new way to tame inflation and lower rates, but that's just not the reality," Cohn said. "What I’m really looking to see is just how hawkish Warsh is, and because it’s his second meeting and press conference — if he holds one — if there’s more transparency. It’ll be interesting to see how he’s going to choose to continue to communicate to the general public."
Beyond the rate decision, Williamson said the change in how the Fed communicates is itself worth watching. Chair Kevin Warsh has been explicit about his skepticism of forward guidance, the practice of telegraphing future rate moves, and for brokers advising clients on rate lock timing, that shift matters as much as whatever the Fed announces Wednesday.
Williamson said the volatility implications of that shift are direct, since a CPI print, an employment report, or a Fed governor's speech can now move rates in ways that would previously have been dampened by explicit guidance.
"Less forward guidance puts more weight on incoming economic data, potentially increasing volatility in Treasury yields and mortgage rates as each new inflation or employment report arrives," he said. "Even so, economists will still have plenty of inter-meeting signals to interpret from Fed speeches, public appearances and meeting minutes."
The impact of higher rates
Charles Goodwin, vice president and head of bridge and DSCR lending at Kiavi, said the current rate range is likely to hold.
"Mortgage rates have increased back into the 6.60-6.70% range due to inflation expectations and hawkish commentary from the Fed," Goodwin said. "Expect rates to stay in this range barring any breakthroughs in the Middle East, easing inflation data, or very weak labor data."
The geopolitical backdrop adds another variable. Renewed hostilities in the Middle East have put upward pressure on energy prices, and Williamson said a sustained energy price shock would complicate the Fed's job considerably.
"A sustained energy shock would complicate the Fed's dual mandate by keeping pressure on inflation, while weakening household purchasing power and posing downside risks to growth," he said. "With the labor market still stable, inflation is likely to remain the Fed's more immediate concern, but policymakers would probably need definitive evidence that higher energy costs were starting to spread into broader prices before raising rates."
Williamson said the higher-for-longer environment does not have to mean a frozen market.
"While higher rates can weigh on home sales, the silver lining is that the market does not need a return to ultra-low rates to continue healing," he said. "Slower house-price growth, rising incomes, more inventory and a gradually easing lock-in effect can improve affordability and support a broader thaw, even if mortgage rates remain elevated."
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
