Mortgage Rates Set To Rise After Fed Chair’s ‘Surprising’ Comment About a December Cut

The Federal Reserve's interest rate cut this week was widely expected, but Fed Chair Jerome Powell's comments afterward included surprises that are poised to send mortgage rates higher.

After Fed policymakers voted to cut the benchmark rate by a quarter point, Powell told reporters that another rate cut in December is "far from" certain, acknowledging deep divisions in opinion on the 12-member rate-setting panel.

"In the committee's discussions at this meeting, there were strongly differing views about how to proceed in December," said Powell. "A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it. Policy is not on a preset course."

Bond markets reacted with alarm, with the key 10-year Treasury yield surging back above 4% as Powell spoke, a leading indicator that mortgage rates are set to rise.

Although Freddie Mac's weekly average mortgage rate released Thursday showed a slight dip, to 6.17%, daily tracking indicators suggest that mortgage rates have already shot back above 6.3% since Powell spoke.

That's because investors, and not the Fed directly, determine mortgage rates as they make bets on the value of long-duration debt. And investors seem spooked by Powell's commentary, as well as the apparent breakdown of consensus on the rate-setting Federal Open Market Committee (FOMC).

"What was most surprising about yesterday was Chair Powell's emphasis that the December meeting decision was not a foregone conclusion," BNP Paribas Chief U.S. Economist James Egelhof said in a webinar hosted by The Bond Buyer.

Egelhof noted that Powell's comments seemed to emphasize economic factors that would tend to support putting rates on hold in December, in defiance of the widespread market expectation of another Fed cut before the end of the year.

"Chair Powell, in an unprecedented—in an unprecedented way, seemed to be almost in dissent yesterday, where he was arguing economic views that he would then simultaneously distance himself from," said Egelhof.

It is possible that Powell was attempting to summarize the various viewpoints that FOMC members raised during the closed deliberations, where it is clear that deep disagreements on policy played out.

Incredibly, Wednesday's final vote on interest rates included two dissents in opposing directions: Trump-appointed Fed Gov. Stephen Miran voted for a larger half-point cut, and Kansas City Federal Reserve Bank President Jeffrey Schmid voted to leave the policy rate unchanged.

It was the first time in more than six years that two FOMC voters had dissented from the majority in opposite directions, underscoring the deep divisions on the panel, which normally prizes a public image of placid consensus.

Those growing divisions, and Powell's stark remarks about a December rate cut, threw bond markets into a tizzy as investors adjusted their estimation of another cut this year.

Financial markets now estimate a 73% chance of another interest rate cut in December, down from roughly 90% the day before Powell's press conference, according to CME FedWatch.

"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 resulting market turmoil will send mortgage rates up noticeably in the coming days. Those rates had been trending down since May, when they reached a recent peak of 6.89%, but are expected to rise off the one-year low of 6.17% reached last week.

It remains to be seen whether the immediate spike in rates following Powell's comments will persist, or whether markets will settle back down by the December FOMC meeting.

"Perhaps investors were overly optimistic about the December outlook (and beyond) and got ahead of themselves, resulting in a correction today," says Krimmel. "If it's a simple recalibration of expectations, stemming from investors who got ahead of themselves, my hunch is this is a one-time type jump rather than something that's going to put us back where we were in the spring."