Mortgage rates are notoriously unpredictable, but they respond reliably to one bit of economic news: rate hikes by the Federal Reserve.
This week’s must-watch economic news comes Wednesday, when the central bank’s Federal Open Market Committee wraps up a May meeting that’s widely expected to bring another rate hike. In March, the Fed raised rates for the first time in years, an acknowledgment that inflation has been running way too hot. The inflation figure for March came in at a scalding 8.5 percent.
The dramatic rise in inflation over the past year has all but forced the Fed to boost rates. Skeptics say the central bank had been slow to respond to the highest inflation in decades.
The central bank has also been unwinding its pandemic economic stimulus. The Fed was buying $120 billion in Treasury bonds and mortgage-backed securities every month, but has begun slowing those purchases.
It’s unclear whether mortgage rates will move at all, though, on news of a hike — nearly everyone expects a 0.5-percentage point increase in rates this week, an expectation that has been built into mortgage rates.
The other item on the economic agenda is the monthly jobs report. The U.S. Labor Department on Friday releases employment statistics for April, and that report will give a view of the health of the economic recovery.
The Fed doesn’t directly dictate mortgage rates, and the calculus behind how much you pay for a home loan is complicated, but here’s one easy rule of thumb: The 30-year fixed-rate mortgage closely tracks the 10-year Treasury yield. When that rate goes up, the popular 30-year fixed-rate mortgage tends to do the same.
Rates for fixed mortgages are also influenced by other factors, such as supply and demand. When mortgage lenders have too much business, they raise rates to decrease demand. When business is light, they tend to cut rates to attract more customers.
Rates ultimately are set by the investors who buy your loan. Most U.S. mortgages are packaged as securities and resold to investors. Your lender offers you an interest rate that investors on the secondary market are willing to pay.