Fed Speech Pushes Rate Hike Odds to 50-50

The odds of a rate hike by the Federal Reserve (the Fed) have shifted to 50-50 following remarks by Governor Christopher Waller on Sept. 3, sparking a rally in stocks and bonds, and potentially signaling a dip in mortgage rates ahead of the next Fed meeting.

Waller’s Speech: A Shift in Expectations

In a speech at the Reuters NEXT Newsmaker event, Waller indicated he was inclined to hold short-term interest rates steady, but left the door open for a hike if inflation data due Sept. 11 comes in higher than expected. This stance contrasts with recent comments from Fed Chair Kevin Warsh and Governor Michael Barr, who have suggested a rate hike could be coming.

Waller acknowledged that while inflation remains above the Fed’s 2% target, there are signs of disinflation. He would support keeping rates unchanged if this trend continues, but would consider a rate hike if inflation shows signs of reversing. The governor emphasized that with economic activity and the labor market in good shape, the current setting for the federal funds rate remains appropriate unless the upcoming inflation report deteriorates. He noted that if evidence emerges that progress toward the 2% inflation goal reversed in August, a small adjustment in the Fed’s stance would help ensure that progress resumes.

The Federal Reserve is scheduled to meet Sept. 15-16 and will have Friday’s jobs report and next week’s inflation data to consider when making its decision. Waller’s measured approach reflects the central bank’s data-dependent stance, balancing the need to combat inflation while acknowledging recent encouraging signs in the economic data.

Market Reaction and Mortgage Rates

The likelihood of a rate hike at the Fed’s Sept. 15-16 meeting fell to 50.4% following Waller’s comments, down from 63.2% the previous day, according to CME Group’s FedWatch tool. Meanwhile, stocks and bonds rallied, and 10-year treasury bonds dropped, which could lead to a decrease in mortgage rates in the coming days.

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However, mortgage rates continue to trend upward for now. The 30-year rate averaged 6.71% this week, up from 6.66% the week before, according to Freddie Mac. Mortgage News Daily pegged the average daily rate at 6.88% on Sept. 3. Both measures are significantly higher compared to a year ago, creating headwinds for prospective homebuyers.

This increase, partly driven by escalating oil prices and renewed inflation concerns, could squeeze housing affordability if not addressed. The latest escalation in the Middle East has once again pushed oil prices higher, reviving inflation concerns and driving mortgage rates back up, according to Jiayi Xu, senior economist at Realtor.com. Higher inflation would simultaneously erode paychecks and real income growth while keeping mortgage rates raised for longer. That’s a squeeze on housing from both sides: what people can afford, and what they’re willing to buy into. If inflation isn’t tamed, the pain will be real.

Despite rising mortgage rates, committed buyers may find more fresh listings. Redfin reported that new listings rose 2.1% on a seasonally adjusted basis for the week ending Aug. 30, the highest level in four years. Active listings were also up 0.4% while pending sales were essentially flat. Mortgage applications to purchase homes also rose 2%, and there was an uptick in borrowers choosing adjustable-rate mortgages. In many local markets, potential buyers have plenty of homes to choose from, and this is likely supporting transaction volume, said Mike Fratantoni, MBA’s chief economist.

As the Fed waits for inflation data, the housing market’s performance will depend on how buyers and sellers handle the current rate environment.

Christopher Waller’s comments have injected uncertainty into the Fed’s next move, with the market now evenly split on the likelihood of a rate hike. While mortgage rates remain raised, committed buyers may find opportunities in the increased inventory of new listings.