Mortgage Rates Edged Up As Bank Contagion Risk Moderates

Mortgage rates increased this week, as concerns about the fragility of the banking system may be subsiding.

The recent banking sector turmoil ignited fears of a looming credit crunch. The supply of bank credit is an important driver of macroeconomic outcomes, with significant implications for employment and output. A contraction in the supply of commercial and industrial loans would result in a rapid cooling of the US economy. Those fears seem to be moderating and a number of leading indicators suggest the US economy is still on solid footing. That means inflation may still be slow to come down, leaving the door open for more Fed policy tightening and causing rates to remain elevated. But economic forecasts differ –  tighter financial conditions and a resulting cooling of the US economy would have the opposite effect.

Mortgage rate volatility should persist as investors and markets interpret this week’s inflation reading from the PCE price index.