Mortgage rates decreased this week due in large part to more dovish language from a key Federal Reserve official speech that points to slower economic activity and downside inflation risk. Christopher Waller, a member of the Federal Open Market Committee, expressed that Fed policy was sufficiently restrictive and that financial conditions were, on balance, tighter now than in the first half of the year – factors likely to drag down consumer and business spending. 

With inflation and inflation expectations continuing to move toward the Fed’s 2% target, a Fed policy pivot becomes more likely, if only to prevent monetary policy from becoming more restrictive and engineering an economic downturn. New data arriving in the coming months will help to clarify just how much monetary policy may need to be recalibrated. 

Long term interest rates depend on expected inflation and economic growth. So long as core inflation and economic activity continues to moderate, mortgage rates may finally start to level off. A cooling labor market and a moderation in rental prices are among the factors dragging down core inflation. The decline in long dated yields – and the mortgage rates that follow them – is welcome relief for prospective home buyers. However, if next week’s employment report shows higher-than-expected wage growth in November, then yields could surge back up.