Oil Prices, Fed Comments Push Mortgage Rates to Five-Year High

Mortgage rates increased by about 10 basis point earlier this week, touching highs not seen since fall 2013 and briefly breaching the 4.5 percent threshold. The typical 30-year fixed mortgage rate quoted on Zillow is now 4.49 percent.

A combination of strong data, geopolitical risk and comments from several Federal Reserve officials contributed to the jump. Inflation and retail sales data point to rising inflation, a key indicator that has been lagging for much of the economic recovery, and upward revisions to retail sales data suggest a confident American consumer.

At the same time, oil prices have increased in recent weeks – a trend exacerbated by geopolitical tensions in the Middle East with the U.S. withdrawal from the Iranian nuclear agreement and tensions around the opening of a new U.S. embassy in Jerusalem. Higher oil prices will push headline inflation higher and spill over to a broad range of consumer prices.

Finally, comments from several Federal Reserve officials have raised questions about the Fed’s legacy crisis-era bond holdings and whether the central bank will hold its portfolio to maturity or prematurely sell bonds. The level of the portfolio holdings is one factor that have continued to hold long-term lending rates low.

Several comments also raised the possibility that the Federal Open Market Committee could lift short-term interest rates four more times this year rather than three as expected.