‘The Fed might have to really stop on the brakes’: Mortgage rates surge to highest level in over a year

The 15-year fixed-rate mortgage, meanwhile, rose 10 basis points to an average of 2.43%. The 5-year Treasury-indexed adjustable-rate mortgage averaged 2.41%, unchanged from the previous week.

Right now, most signs point to interest rates continuing to climb higher in the year to come. In particular, the economic recovery from the COVID-19 pandemic remains strong. There are around 11 million job openings nationwide now, providing ample runway for the job market, which should bring the unemployment rate down. Supply-chain issues remain, but have shown some signs of abating.

High levels of inflation, meanwhile, mean that the Federal Reserve looks set to take decisive action more quickly than previously expected. “With economic momentum gaining, the Federal Reserve’s recently-released minutes point to a faster pace of balance sheet reduction in the months ahead,” said George Ratiu, manager of economic research at Realtor.com, adding that this pushed the 10-year Treasury note’s yield
TMUBMUSD10Y,
1.723%
to the highest level since last May.

Typically, mortgage rates generally follow the direction of long-term bond yields, including that of the 10-year Treasury. “This also indicates that rising mortgage rates are on the horizon,” Ratiu said.

Economists generally expect mortgage rates to rise higher this year. The question is: How high? Michael Frantantoni, chief economist at the Mortgage Bankers Association, said his team predicts mortgage rates will end the year around 4%. And he said that an even more pronounced increase in rates was more likely, as of now, than a decrease in interest rates.

“This inflation picture we’re talking about — if it doesn’t cool off, the Fed might have to really stop on the brakes as opposed to gently tapping them, and we could see the rate path move even higher even faster than we have in our baseline forecast,” he said during a Barron’s Live webcast on Wednesday.

“Honestly, I wouldn’t even have talked about the higher rate path much last year, so the fact that I bring it up [indicates] there is probably a higher probability than another drop in rates,” he added.

This isn’t to say another drop in rates isn’t possible, as Fratantoni pointed to two factor that could bring rates down again. For starters, he said that another, more severe coronavirus variant could cause economic upheaval in the future if it were to gain traction as the latest omicron variant has done.

Additionally, he suggested that geopolitical unrest could cause investors to seek safety in bonds, which would bring rates down. Examples of this include a potential Russian invasion of Ukraine or an escalation in tensions between China and Taiwan, he said.

“I often tell people that this job keeps you humble because rates can move for any number of reasons and in directions that really will surprise most of us,” Fratantoni said. “So could rates go down? Absolutely. I don’t think it’s the most likely outcome, but it could happen.”