Ukraine, Fed Rate Hikes, and Inflation: What’s Moving Mortgage Rates and Why

Blog posted On March 08, 2022

Last week was a whirlwind for mortgage rates. On Monday and Tuesday, the average mortgage rate dropped more than almost any other 48-hour period in the past 10+ years. Then, on Wednesday, they shot right back up. Different factors are influencing rates drastically right now, pushing and pulling them in different directions. However, they will likely begin to level out in the long run, falling into a more consistent and predictable trend. 

Ukraine conflict

When the signs of geopolitical conflict arise, investors typically shift to the safety of bonds. This causes the U.S. Treasury yields to drop lower, which influences mortgage rates. “While inflationary pressures remain, the cascading impacts of the war in Ukraine have created market uncertainty,” said Sam Khater, chief economist at Freddie Mac. “Consequently, rates are expected to stay low in the short-term but will likely increase in the coming months.”

Inflation pressures

Although rates might be trending lower right now, they will likely begin trending upward in the long run. The short run factor is investors jumping to the bond market. The long run factor is possible higher inflation. One of the many economic effects of the situation in Ukraine could be higher levels of inflation via increased oil prices. Higher inflation levels are one of the factors that affects the bond market and pushes rates higher. “The bond market cares about inflation,” says Barry Habib, CEO and founder of MBS Highway. “By the Fed doing less to fight inflation—the bond market [is not happy.]”

Fed rate hikes

Earlier in the year, the likelihood of the Fed raising rates was one of the factors pushing mortgage rates higher. Now, it’s slightly the opposite. Last week, Fed Chairman Jerome Powell gave his semi-annual testimony before Congress. In his testimony, he said that he would “support a 25-basis-point rate hike” in the March meeting of the Federal Open Market Committee (FOMC). This is scaled back from the previous enthusiasm for a 50-basis-point hike. The higher the hike, the greater the likelihood of cooling inflation. After the markets caught wind of this statement from Powell, mortgage bonds were very unhappy. They took a sharp tumble, resulting in a sharp upward trend from mortgage rates.

The sharpness of the upward trend has leveled out a bit, but the future trajectory for rates remains slightly unclear. It will depend on various factors including how the Ukraine situation develops and how inflation reacts. “If the Fed thinks the biggest impact of this disruption will be more upward inflationary pressure, then they will presumably stay the course they laid out, perhaps even accelerate it a bit,” said Jim Parrott, a former senior economic advisor in the Obama administration. “If instead they decide that the larger impact will be to cool the economy, they might decide to move more cautiously.”

If you would like to learn more about the factors influencing mortgage rates and mortgage rate trajectory, let us know.

Sources: HousingWire, HousingWire, HousingWire, MBS Highway, Mortgage News Daily