Mortgage Rates Fall As Inflation Eases And Fed Signals Smaller Hikes Ahead

Mortgage rates fell to a two-month low this week as bond investors bet inflation will continue easing and the Federal Reserve signaled it will slow its pace of rate hikes.

The average U.S rate for a 30-year fixed mortgage dropped to 6.49% while the average rate for a 15-year fixed home loan fell to 5.76%, according to a Freddie Mac report on Thursday. Both averages retreated for the third consecutive week, according to Freddie Mac data.

“Mortgage rates continued to drop this week as optimism grows around the prospect that the Federal Reserve will slow its pace of rate hikes,” said Sam Khater, Freddie Mac’s chief economist.

Rates for home loans continued to fall as the investors who buy mortgage bonds reacted to economic data showing inflation easing from four-decade highs. When inflation is gaining, fixed-asset investors tend to demand higher yields to protect their returns, which results in higher mortgage rates.

The Fed lifted its benchmark rate six times this year to fight inflation, the most aggressive tightening campaign since the 1980s. Having the rate the Fed charges banks for overnight lending at a 15-year high doesn’t directly impact home loan rates, but it influences bond investors by signaling the direction of the economy.

Fed economists now put the risk of a recession at 50-50, according to minutes of the Nov. 1-2 meeting released last week. A “substantial majority” of voting members of the policy-setting Federal Open Market Committee support slowing down the tightening pace soon, the minutes said.

“The time for moderating the pace of rate increases may come as soon as the December meeting,” Fed Chairman Jerome Powell said on Wednesday in a speech at the Brookings Institution in Washington. “The timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.”

Average rates for 30-year fixed mortgages likely will peak this quarter at 6.7% and fall to 5.2% in 2023’s fourth quarter, according to a forecast last week from the Mortgage Bankers Association.

“With signs of economic slowing both in the U.S. and globally, mortgage rates will remain volatile but are likely to continue to trend downward,” said MBA President Bob Broeksmit.