Mortgage rates have fallen today to the lowest level seen this year, due to a dropping yield on the 10-year Treasury bond. Investors are flocking to Treasurys after last week’s jobs report boosted concerns of a sluggish U.S. economy and a possible recession. The rate on a 30-year fixed-rate conventional mortgage directly correlates with the yield on the 10-year Treasury, so when the Treasury yield falls, so do mortgage rates.
Will the Fed respond with a rate cut?
Last week’s Fed meeting concluded with the Federal Open Market Committee’s voting to continue holding their key benchmark rate at 5.25-5.5 percent — a 22-year high — for the eighth consecutive time.
“The Federal Reserve kept the federal funds target unchanged at its July meeting but hinted at a cut in September,” says Fratantoni. “The weakness in this [recent jobs] report, including the slower rate of wage growth and the higher unemployment rate, certainly supports such a cut, but the next inflation report needs to confirm that price growth is also slowing.”
While speaking of the possibility of a rate cut in September, Fed chair Jerome Powell reiterated the Federal Reserve’s dual mandate to keep both inflation and unemployment in check. The Fed meets next September 17 and 18. With high unemployment data causing tumult in the market, some economists are calling for a rate cut between meetings, but others are skeptical as to whether the Fed will actually take such a step.
“Not unless we see liquidity issues in financial markets,” says McBride. “114,000 new jobs and an overdue market correction won’t do it.”
The next Consumer Price Index report, detailing July’s inflation rate, is due out August 14. If inflation’s growth falls within the Fed’s target of 2 percent, a rate cut in September would be likely.
The Federal Reserve doesn’t set home loan rates outright. But its monetary policy moves do impact interest rates and, in turn, investors’ search for returns. When they seek out Treasurys, the bonds’ prices rise and their yields fall. Tied as they are to the 10-year Treasury, mortgage rates then follow suit.