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Mortgage rates have recently surged back to 7% despite a series of rate cuts by the Federal Reserve. Between April and September 2024, the average 30-year fixed mortgage rate fell to 6.11% following weaker jobs reports and fears of a recession. However, as unemployment data improved and inflation remained above the Fed’s 2% target, these recession fears eased, leading to a sell-off of bonds and mortgage-backed securities. This sell-off, in turn, raised bond yields, pushing mortgage rates higher.
Another significant factor contributing to the increase in mortgage rates is fiscal policy uncertainty. As financial markets assess potential 2025 fiscal policies, the outlook for government borrowing and deficits becomes crucial. Increased government borrowing can drive up yields on Treasury bonds, which often move in tandem with mortgage rates. If deficits rise, long-term yields might climb even further due to higher inflation concerns, further pressuring mortgage rates to increase.
Financial markets are reacting to both short-term economic indicators and long-term fiscal expectations, particularly as the political landscape evolves. Divided government, inflationary policy proposals, and the trajectory of the 10-year Treasury yield all play significant roles in mortgage rate trends.
Should employment data soften and inflation fall in line with the Fed’s targets in the near future, mortgage rates could begin to decrease again. But for now, with a strong labor market and persistent inflation, mortgage rates may remain elevated, with further fluctuations depending on fiscal policy developments and bond market reactions.
In summary, the complex relationship between short-term economic performance, inflation, bond yields, and fiscal policy keeps mortgage rates elevated despite the Federal Reserve’s efforts to lower borrowing costs.
