Mortgage rates decreased this week on softer than expected consumer price inflation and leading economic indicators pointing to a slowdown in economic activity. As a result, bond markets began pricing in rate cuts midway through 2024 despite Federal Open Market Committee (FOMC) minutes suggesting a policy reversal isn’t likely at least until core inflation returns to the Federal Reserve’s target. 

Long term interest rates depend on expected inflation and economic growth. The decline in long dated yields – and the mortgage rates that follow them – is welcome relief for prospective home buyers. However, it’s unclear if this recent decline has staying power. The FOMC had expected headwinds to economic activity to come from tighter financial conditions, student loan repayments and a government shutdown. But, financial conditions have loosened somewhat, student loan repayments are having little impact and a government shutdown was averted.

New data arriving in the coming months will help to clarify how much monetary policy may need to be recalibrated. So long as core inflation continues to move in the right direction, mortgage rates may finally start to level off. A return to low and stable inflation will support more sustainable economic growth and a less volatile interest rate environment. This should ultimately lead to more home buyers, sellers and sales. But in the meantime, a data dependent Fed and higher than normal bond market sensitivity to new data will likely keep mortgage rate volatility elevated in the near term.