Odds of a rate hike now 50-50 following Fed governor's speech
Christopher Waller said the Fed shouldn’t hike short-term interest rates unless inflation worsens. Mortgage rates, however, are still rising for now.
Key points:
- Federal Reserve Governor Waller, who spoke on Sept. 3, appeared inclined to hold rates steady but acknowledged that he would support an increase “if inflation comes in hot” next week.
- Stocks and bonds rallied on Waller’s overall dovish tone, which could mean some easing of 30-year mortgage rates in the days ahead. Average rates rose to 6.71% this week.
- While mortgage rates have trended the wrong direction for buyers, an uptick in new listings is providing more inventory for those who are shopping for a home.
For anyone watching mortgage rates, it's been a discouraging week. But one Federal Reserve governor is offering a more optimistic outlook ahead of the upcoming Fed meeting.
Inflation will likely determine the Fed's next move
In remarks given at the Reuters NEXT Newsmaker event on Sept. 3, Christopher Waller said that "with economic activity and the labor market in good shape," he would support keeping short-term interest rates at their current levels — unless the Sept. 11 inflation report comes in worse than expected.
Other Fed officials, including Fed Chair Kevin Warsh and Fed Gov. Michael Barr, have recently suggested that a rate hike could be coming, and despite his more hike-averse stance, Waller said he wouldn't rule it out.
"While inflation remains meaningfully above the Federal Open Market Committee's (FOMC) 2 percent goal, recent data suggest we are finally seeing some signs of disinflation. If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting," Waller said in his speech.
But, he added, "if inflation comes in hot, I would consider a rate hike."
"If there is evidence that progress toward 2 percent inflation reversed in August, a small adjustment in our stance would help ensure that it resumes."
The market reacted quickly
Following Waller's comments, the CME Group's FedWatch tool put the chances of a short-term interest rate hike at 50.4%, down significantly from 63.2% the day before. The Federal Reserve meets Sept. 15-16 and will have Friday's jobs report and next week's inflation data to consider when making its decision.
The overall dovish tone from Waller also sparked a rally on Wall Street and sent 10-year treasury bonds down, which could mean a dip in mortgage rates in the coming days.
Inflation concerns rising — along with mortgage rates
For now, however, mortgage rates are still trending up. The 30-year rate averaged 6.71% this week, up from 6.66% the week before, according to Freddie Mac, while Mortgage News Daily pegged the average daily rate at 6.88% on Sept. 3. Both measures are significantly higher compared to a year ago.
The latest escalation in the Middle East has once again pushed oil prices higher, reviving inflation concerns and driving mortgage rates back up, according to Jiayi Xu, senior economist at Realtor.com.
"Higher inflation would simultaneously erode paychecks and real income growth while keeping mortgage rates elevated for longer. That's a squeeze on housing from both sides: what people can afford, and what they're willing to buy into," Xu said.
If inflation isn't tamed, she added, "the pain will be real."
Good prospects for committed buyers
It's still the case that those willing to dip their toe into the market are finding more fresh listings. Redfin reported that new listings for the week ending Aug. 30 were up 2.1% from a week earlier on a seasonally adjusted basis. That's the highest level in four years.
Active listings were also up 0.4% while pending sales were essentially flat.
Despite the rise in mortgage rates, applications to purchase homes rose 2% compared to the week before, according to the Mortgage Bankers Association, which also reported an uptick in borrowers choosing adjustable rate mortgages.
"In many local markets, potential buyers have plenty of homes to choose from, and this is likely supporting transaction volume," said Mike Fratantoni, MBA's chief economist.