Investors, not the Fed, may influence where mortgage rates go next 

It's a pivotal week for financial markets — and potentially housing — as the Federal Reserve considers whether to raise short-term interest rates. For mortgage rates specifically, however, any movement may come down to how investors react to the Fed's decision.

Analysts are currently pricing in a series of rate hikes ahead of the Sept. 16 Federal Open Market Committee (FOMC) meeting, and that is causing 10-year treasury bonds to spike again after jumping last week. Higher bond yields, along with inflation fears and rising oil prices, pushed average 30-year rates over 7% for the first time in 16 months on Sept. 10. This morning, Mortgage News Daily pegged the daily rate at 7.17%, nearly a full percentage point higher than a year ago. 

Inflation 'likely to get worse': The odds of a September short-term interest rate hike, according to CME Group's FedWatch Tool, are now at 92.7%. Investors are betting on a rate increase because there are no clear indications that inflation is easing, according to Melissa Cohn, regional vice president of William Raveis Mortgage.

"It's likely to get worse before it gets better," Cohn said.

Mortgage rates could hold steady, or even fall: Since short-term rates are not directly tied to mortgage rates, a 25-point rate hike wouldn't necessarily affect 30-year loans. Cohn noted that in 2025 when the Fed was cutting interest rates, mortgage rates went up.

"So who's to say that in 2026, if the Fed raises rates, that mortgage rates can't come down?" Cohn speculated in an email.

Wall Street's influence: Raising short-term interest rates would give investors more confidence that inflation is being addressed, and that could eventually open the door to lower mortgage rates, according to Sam Williamson, senior economist at First American. 

"With much of that adjustment already underway, the bigger question is what the Fed signals about the path ahead," Williamson said. Some of those signals may be found in the Fed's upcoming Summary of Economic Projections, which investors will be reading closely.

Kevin Warsh has pushed for policy changes at the Fed since taking over as chair in May, and at a press conference in June, Warsh said he believes financial markets perform best when they react to incoming data rather than the Fed's guidance — suggesting investors shouldn't necessarily be taking their cues from the FOMC, but should instead be "deciding what is good data and what is less good data" and making decisions based on those assessments.  

ARMs increasing in popularity: In the meantime, Cohn said homebuyers who need to transact now are looking at adjustable rate mortgages in hopes that rates will eventually come down. That's a trend the Mortgage Bankers Association has also noticed in recent weeks.

"It's crazy what's going on, but there are people who still need to buy houses," Cohn said, adding that many buyers may have to downsize their expectations during this period.