After falling slightly last week, mortgage rates rose sharply this week, erasing some of the progress made on the housing affordability front in the past few months.
A stronger than expected employment report, the continued unwinding of $95 billion worth of Treasury and Mortgage Backed Securities each month and more hawkish recent comments by Federal Reserve officials are putting upward pressure on bond yields and the mortgage rates they tend to influence.
A number of Fed officials spoke this week with the same general message: interest rates must go higher and stay high for a few years in order to ‘kill inflation’. A stronger-than-expected labor market is the reason given. Employment rose by 517,000 jobs nationwide in January and strong labor demand – especially in the services sector – has kept wage growth elevated. Since then, financial conditions have tightened again.
But with a slew of leading indicators pointing to a slowing economy, the rapid deceleration of consumer price growth, and falling inflation expectations, more aggressive policy tightening could drive the risk of recession higher and pull long term rates down again.
Next week’s Consumer Price Index report will likely cause more policy uncertainty and higher mortgage rate volatility.