After a small uptick last week, mortgage rates fell this week on Fed expectations and cooling wage growth. The Federal Reserve decided to hold the bank’s key interest rate steady this week. Although core inflation has inched closer to the Fed’s two-percent target and the labor market has softened, economic activity remains strong. The Fed chair acknowledged that monetary policy is now in restrictive territory. However, acting too soon to move policy to a less restrictive stance could undo progress on the inflation front. Fed funds futures currently indicate traders are pricing in three quarter-point rate cuts before the end of the year, starting in September. 

Treasury yields and the mortgage rates that tend to follow them depend on forecasts for inflation and economic growth. If the economy continues to charge ahead faster than expected, Treasury yields could stay elevated. However, more stable inflation and more sustainable economic growth could also help lower the spread between the 10-year Treasury yield and the 30-year fixed rate mortgage.

This week’s release of the July employment situation will likely cause investors to reassess their forecasts, meaning more rate volatility ahead.