As Fed Holds Steady, Are 7.5% Mortgage Rates Still Possible?

On Wednesday, Oct. 28, the Federal Reserve announced that central bankers would leave the federal funds rate unchanged. Since this was in line with market expectations, mortgage rates shouldn’t have much of a reaction — yet.

The average rate on a 30-year fixed-rate mortgage slid 10 basis points to 7.17% APR in the week ending Oct. 28, according to rates provided to NerdWallet by Zillow. (A basis point is one one-hundredth of a percentage point.) We calculate our weekly average using daily APRs recorded over the past five business days.

We expected this outcome

Central bankers have twin goals when setting monetary policy: Getting inflation as close to 2% as possible, and maintaining maximum employment. When inflation gets too high, the Fed can raise the federal funds rate, which causes consumer borrowing rates (like mortgage rates) to rise as well. When unemployment gets too high, they can lower the federal funds rate to make it cheaper for businesses to access credit and hire more employees.

Since the latest jobs report showed that employment was relatively steady last month, that leaves inflation as the hot topic.

Despite Fed Chair Kevin Warsh holding true to his signature tight-lipped style in the weeks leading up to the meeting — and despite September’s preliminary inflation numbers running high so far — futures traders were largely confident that the Fed would keep the federal funds rate as is this week after last month’s hike.

Does this mean mortgage rates will stay below 7.5%?

Not necessarily. Mortgage rates could be completely different tomorrow.

In fact, we’ll probably see rates shift in response to the Personal Consumption Expenditures price index, or PCE, which is set to be released on Thursday, Oct. 29. This is the Fed’s preferred measure of inflation. Central bankers didn’t have this data during voting, which may be one reason they decided against adjusting the federal funds rate again quite yet.

If this week’s PCE data shows inflation rising, mortgage rates will probably go up over the next few weeks as lenders look to protect their investment against a weakening dollar. Rising inflation also bolsters the case for a rate hike at the central bankers’ next meeting; according to the futures traders behind CME FedWatch, there’s a very good chance that the Fed will announce an increase on Dec. 9.

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And there is reason to think that PCE will show growing inflation. September’s monthly Consumer Price Index (CPI), which measures changes in prices of everyday goods and services, was released on Oct. 14 and showed annual inflation rising to 3.7%.

Of course, mortgage rates respond to all sorts of things. Oil prices, the bond market, global and national events — any number of hard-to-predict happenings could swing rates in the coming days and weeks. But if market analysts dig their heels into the idea of a December rate hike from the Fed, you should probably prepare for higher mortgage rates in November.

So far, 30-year mortgage rates are averaging 7.3% for October, compared with September’s average of 6.98%. On this trajectory, it’s conceivable that we could see rates hit 7.5% this year — a monthly average we haven’t seen since October 2023.

Why higher rates wouldn’t be the end of the world

If and when the Fed does raise the federal funds rate again, it will be meant as a temporary treatment for overheated inflation.

Think of it as bitter medicine: It might be tough to swallow, but getting inflation under control actually paves the way for lower rates down the line. Moderating inflation could also lead to lower prices on essential goods that have been eating away at the prospective home buyer’s wallet, freeing up more cash for your monthly mortgage payment.

The article As Fed Holds Steady, Are 7.5% Mortgage Rates Still Possible? originally appeared on NerdWallet.