Mortgage Rates May Rise as Powell Signals December Cut Is Unlikely

Mortgage rates are set to rise, and it's all thanks to some surprising comments from Federal Reserve Chair Jerome Powell. After the Fed decided to trim its benchmark interest rate this week, which many of us were expecting, Powell dropped a bit of a bombshell. He suggested that another rate cut in December is far from a sure thing. This unexpected statement has sent ripples through the financial markets, and it's likely to mean higher borrowing costs for anyone looking to buy a home or refinance an existing mortgage.

Mortgage Rates May Rise as Powell Signals December Cut Is Unlikely

As I see it, this is a pretty significant twist in the story of mortgage rates. For months, we've seen a general downward trend. Homebuyers and homeowners alike have been hoping for lower borrowing costs. However, Powell's recent remarks have thrown a bit of a wrench into those plans. The bond market, which is sort of a crystal ball for mortgage rates, reacted immediately.

The yield on the 10-year Treasury note, a key indicator, jumped back above 4% right after Powell finished speaking. Right now, daily tracking shows mortgage rates have already edged above 6.3%, which is a notable increase from the recent dip to 6.17% reported by Freddie Mac just a few days ago.

Why Powell's Words Matter So Much

Now, you might be wondering why the Fed Chair's words have such a direct impact on your mortgage. It's important to understand that the Federal Reserve doesn't directly set mortgage rates. Instead, investors who buy and sell bonds have a big say in what those rates end up being. They make bets on the future value of long-term debt, and these bets are heavily influenced by what they believe the Federal Reserve will do with interest rates.

When Powell signaled that further rate cuts weren't guaranteed and that there were “deep divisions” among the Fed's decision-makers, investors got spooked. They had been pretty confident that another rate cut was coming in December, with market watchers giving it around a 90% chance before Powell's press conference. Now, that number has dropped significantly to about 73% according to CME FedWatch. This uncertainty is making investors a bit more cautious, and that caution translates into higher yields on bonds, which in turn pushes mortgage rates up.

The “Surprise” Factor: What Really Happened?

What was so surprising about Powell's comments? It wasn't just that he questioned the December cut. It was how he talked about it. He explicitly stated that the decision for December was “not a foregone conclusion, far from it. Policy is not on a preset course.” This is a departure from the usual tone of calm certainty that the Fed often projects.

As James Egelhof, Chief U.S. Economist at BNP Paribas, pointed out, Powell seemed to highlight economic factors that would normally support keeping rates steady in December, almost as if he were arguing against the very idea of a cut he was discussing. It's a bit like he was summarizing different viewpoints within the committee, and those viewpoints are clearly all over the map.

“Powell is very deliberate with not only what he says but how he says it,” says Realtor.com® senior economist Jake Krimmel. “Reading between the lines, it's possible he was telling the market ‘you're getting ahead of yourselves by trying to predict our next move, and making it more difficult for us to do our jobs as a result.'”

The proof of these deep disagreements was evident in the actual vote on interest rates. For the first time in over six years, two members of the powerful Federal Open Market Committee (FOMC) dissented, and they dissented in opposite directions! Federal Governor Stephen Miran voted for a larger half-point cut, while Kansas City Federal Reserve Bank President Jeffrey Schmid voted to keep rates exactly where they were. This kind of division is unusual and underscores the complexity of the economic decisions the Fed faces right now.

My Take: Is This a Blip or a Trend?

From my perspective as someone who follows these markets closely, Powell's comments seem to be a deliberate attempt to manage expectations. He might have been saying to the markets, “Hold on a minute, you're getting a little too far ahead of yourselves in predicting our next moves, and that's making our job harder.”

The immediate reaction in the bond market was definitely a jolt. We had been enjoying a period of declining mortgage rates since May, when they peaked at around 6.89%. Seeing them climb again, even if it's a slight increase from the recent low, can be disheartening for prospective buyers and those looking to refinance.

So, the big question is: will this uptick in mortgage rates last, or is it just a temporary reaction? It's hard to say for sure. As some smart folks are suggesting, it's possible that investors simply got a bit too optimistic about future rate cuts. If this is just a “recalibration of expectations” because investors were jumping the gun, then my hunch is that this might be more of a one-time jump rather than a sustained return to the higher rates we saw earlier in the year.

However, we also need to consider the underlying economic data. Inflation, while cooling, is still a concern, and the job market remains relatively strong. These are factors that the Fed watches very closely. If the economy continues to show signs of resilience, the Fed might indeed be hesitant to cut rates aggressively.

What This Means for You

For anyone in the market for a home right now, this means vigilance is key.

• Get Pre-Approved: If you're thinking of buying, make sure you have your mortgage pre-approval in hand. The rate you lock in will be crucial.
• Shop Around: Don't settle for the first rate you're offered. Compare offers from different lenders.
• Understand the Numbers: Even a small increase in mortgage rates can add up to thousands of dollars in interest over the life of a loan. Know what you can comfortably afford.
• Watch the News: Keep an eye on economic reports and Federal Reserve statements. Staying informed can help you make better decisions.

For those looking to refinance, the window for potentially lower rates might be closing a bit. It’s a good time to re-evaluate your current mortgage and see if refinancing still makes financial sense, even with slightly higher rates in the short term. While Powell's comments have introduced some uncertainty, it's important to remember that the trend has been downward for a while. We'll have to wait and see how things shake out leading up to that December FOMC meeting. But for now, be prepared for the possibility of slightly higher borrowing costs.