Fed Cuts Rates, But Mortgage Costs Climb Higher
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Despite the Federal Reserve's efforts to lower interest rates and potentially make homes more affordable, mortgage costs continue to rise, reports the Wall Street Journal. This unexpected outcome is driven by several factors, including rising long-term Treasury yields and stubborn inflation.
Average 30-year mortgage rates have climbed to around 6.7%, up from roughly 6.1% since the Fed began cutting rates in September. The culprit? Mortgage rates are closely tied to long-term Treasury yields, which have surged this week.
"Mortgage rates are based on long-term Treasury yields," explains the WSJ. "Those are mostly driven by expectations for where short-term interest rates will be in the future, rather than where they are now."
These expectations for future short-term rates have been on the rise, even as the Fed has been actively cutting actual rates. A key factor driving this trend is the recent stall in the decline of inflation, which has remained above the Fed's 2% target.
"After falling steadily back toward the Fed’s 2% target, the pace of price increases has recently stalled out above that level," notes the WSJ. While most analysts still anticipate further inflation reduction next year, the recent trend has made it difficult to dismiss the risk of persistent price pressure.
Adding to the upward pressure on long-term Treasury yields is a broader assessment of risk associated with holding bonds for extended periods. Factors such as persistent inflation, large budget deficits, and the potential for tax cuts and tariffs under a second Trump administration have all contributed to investor hesitancy towards longer-term Treasuries.
The Fed's own actions this week may have further fueled these concerns. The central bank, in its latest forecast, projected higher inflation over the next couple of years, with some officials citing potential policy changes as a contributing factor. Additionally, there was a significant increase in the number of officials who view the risks to inflation as "weighted to the upside," implying a greater likelihood of hotter-than-expected inflation.
Despite these rising costs, potential homebuyers remain hesitant. Mortgage applications to purchase homes, which had briefly increased earlier in the year, have since flatlined.