Mortgage rates jump to 7% following Powell speech

Jerome Powell, the chair of the Federal Reserve, said on Thursday that the U.S. economy is “not sending any signals that we need to be in a hurry to lower rates.” The statement was enough to raise mortgage rates to an even higher level, a sharp departure from the optimism lenders experienced during the September rally, which now seems like a distant memory.

“We are moving policy over time to a more neutral setting. But the path for getting there is not preset,” Powell said in an economic outlook speech in Dallas. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully. Ultimately, the path of the policy rate will depend on how the incoming data and the economic outlook evolve.” 

When considering the Fed’s dual mandate, inflation is getting closer to the 2% goal, but “it is not there yet,” Powell said. Data released this week indicates that personal consumption expenditure rose 2.3% over the 12 months ending in October and 2.8% if excluding volatile food and energy categories.

Meanwhile, the labor market “is now by many metrics back to more normal levels that are consistent with our employment mandate,” Powell said. He added that the unemployment rate at 4.1% is “notably higher than a year ago but has flattened out in recent months and remains historically low.” 

Traders dialed back bets on a December rate reduction. Prior to Powell’s comments, the CME Group‘s FedWatch tool showed that 72% of interest rate traders expected officials to lower rates by 25 basis points, which was reduced to 58.7%. Those who expect rates to remain at the current target range of 4.5% to 4.75% went from 27.8% to 41.2%. 

Financial markets quickly responded to Powell’s comments, with stocks getting hit and Treasury yields spiking. The U.S. 10-year yield jumped to 4.450% on Thursday.

The 30-year fixed mortgage rate, which correlates with long-term government bonds, increased to 6.97% at HousingWire’s Mortgage Rates Center, compared to 6.94% on Monday. At Mortgage News Daily, rates were at 7.02% on Thursday afternoon.

For mortgage lenders, “the upward move in mortgage rates puts the mini-refi rally we experienced in September on ice for the time being,” Derek Sommers and John Hetch, equity analysts at Jefferies, said in a report on Friday. 

During the third quarter, when mortgage rates moved towards 6%, origination volumes increased 17% quarter over quarter for seven companies covered by the analysts – Guild Mortgage, Rocket Mortgage, United Wholesale Mortgage, loanDepot, Mr. Cooper, Onity Group and Pennymac Financial Services. Origination segment earnings increased 126% quarter of quarter “with any meaningful gain-on-sale margin expansion.” 

“Unfortunately, following the end of Q3, mortgage rates increased to about 7%, which has muted the recovery in origination volumes,” the Jefferies analysts said. “Mortgage rates in the range of 6.00%-6.25% is what it takes to stimulate refinance activity in the current environment.”

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