Yields on 10-year Treasury notes — a closely tracked barometer of where mortgage rates are headed next — eased Friday after Federal Reserve Chairman Jerome Powell reiterated that he supports a gradual tapering of the Fed’s support for mortgage rates.
Speaking at a virtual conference hosted by the Swiss-based Bank for International Settlements, Powell acknowledged the growing risk that supply chain bottlenecks could lead to higher inflation. But he resisted suggestions that the Fed could make things worse by waiting too long to raise short-term interest rates.
“Risks are clearly now to longer and more persistent bottlenecks, and thus to higher inflation,” Powell said. “So we now see inflation and the bottlenecks lasting into next year. We’re in the risk management business, not one of absolute certainty. I would say our policy is well positioned to manage a range of plausible outcomes.”
Fed policymakers have been telegraphing their intention to gradually taper the Fed’s purchases of government debt and mortgage-backed securities before raising the short-term federal funds rate.
“I do think it’s time to taper,” Powell said. “I don’t think it’s time to raise rates,” because employment has still not returned to pre-pandemic levels.
To keep interest rates low during the pandemic, the Fed has been buying $40 billion in mortgage-backed securities each month, plus $80 billion long-term Treasurys.
Under one scenario discussed by policymakers in September, the Fed would start tapering its $120 billion in monthly asset purchases in November or December of this year, trimming purchases of mortgage-backed securities by $5 billion a month and Treasurys by $10 billion a month.
One scenario for Fed tapering
Source: Federal Open Market Committee meeting minutes.
On that timetable, Fed policymakers would probably not be prepared to start raising the short-term federal funds rate until June or July at the earliest.
St. Louis Federal Reserve President James Bullard has said he’d like to see a more rapid taper that starts in November and is completed by the end of the first quarter of 2022, so that the Fed could start raising short-term rates before next summer if inflation gets out of hand.
But Powell reiterated Friday that he supports a more gradual tapering plan that wraps up by the middle of next year.
“My expectation is that as Delta fades, and hopefully if we begin to make progress on supply side constraints, [and with] the service side of the economy reopening here … growth will go up closer to the very high levels we saw this summer,” Powell said. “So I think it’s very possible we’ll be at or near labor market conditions that are consistent with maximum employment goal next year. It’s possible. It’s not a certainty, and the range of uncertainty is significant.”
10-year Treasury yield
Source: Yahoo Finance.
After rising all week, yields on 10-year Treasurys dropped by nearly 6 basis points after Powell’s speech, to 1.63 percent, before rebounding as investors digested the Fed chair’s comments.
Mortgage rates and 10-year Treasury yields have been moving up steadily since early August, as investors who view mortgages and government debt as a safe haven started to fret about the potential for higher inflation and the Fed’s expected withdrawal from those debt markets.
Mortgage rates and 10-year Treasury yields
On Aug. 5, 10-year Treasury yields were at 1.21 percent, and 30-year fixed-rate mortgages averaged 2.77 percent. Freddie Mac’s latest weekly lender survey shows rates on 30-year conforming mortgages averaging 3.09 percent during the week ending Oct. 21.
Daily changes in 30-year fixed-rate mortgage rates
The Optimal Blue Mortgage Market Indices, which track daily rate changes, show 30-year conforming loans climbing to 3.31 percent Thursday.
Most mortgages are ultimately funded by investors, so the rates offered to borrowers depend heavily on investor demand for mortgage-backed securities. If Friday’s drop in 10-year Treasury yields is sustained, that could bring some relief to mortgage borrowers next week.
But forecasters have divergent views on where rates are headed next. In an Oct. 17 forecast, MBA economists projected that rates on 30-year fixed-rate mortgages will hit 4 percent by the end of next year, and then flatten at 4.3 percent in the second half of 2022.
MBA and Fannie Mae mortgage rate forecasts
In their most recent forecast, economists at Fannie Mae project a more gradual rise next year with rates staying below 3.5 percent in 2022.