The average U.S. mortgage rate fell for the second consecutive week, down nine basis points to 3.04%, according to Freddie Mac’s Primary Mortgage Market Survey.
Despite rates mirroring mid-march levels, Sam Khater, Freddie Mac’s chief economist, doesn’t expect them to hold.
“The economy is improving on the demand side and on the supply side, a variety of goods and materials remain scarce,” said Khater. “As a result of this imbalance, pricing pressures are building and causing inflation to rise. Despite the pause in mortgage rates recently, we expect them to increase modestly for the remainder of this year.”
The Federal Reserve has been unwavering in its stance on maintaining inflation at 2% before any form of new policy can be made. If inflation does rise above its target, it would put upward pressure on mortgage rates because investors who buy fixed assets use inflation as the mainstay of their calculation that determines the yield, or return, they are willing to accept.
Because higher inflation eats into bond yields, investors demand a higher return for the mortgage-backed securities and other bonds they buy when inflation is rising. Inflation fears also boost yields on Treasuries, which are used as a benchmark for MBS investors.
In a meeting with the Economic Club of Washington on Wednesday, Fed chairman Jerome Powell said it is unlikely that the nation’s economic status reaches a turning point for policy until 2022 – perhaps even longer.
“Most members of the committee did not see raising interest rates until 2024, but that isn’t a committee forecast, it isn’t something we vote on or or act on as a group…it really is just our assessment,” Powell said. “Markets focus too much on what we call the economic predictions, and I would focus more on on the outcomes that we’ve described.”
Rates typically fluctuate ahead of fed announcements and speeches, as traders become hesitant in the market ahead of inflationary talk.