6 things that impact mortgage interest rates (besides the Fed)

Last week, the Federal Reserve surprised financial markets when it implemented a 50-basis-point reduction rather than the widely anticipated 25-basis-point cut. This move sparked optimism among borrowers, as it suggests the rate environment could become more favorable in the coming weeks. It was especially welcome news for those eyeing homeownership or refinancing, though, as mortgage rates have been uncomfortably high in recent years. 

The days leading up to the Fed’s announcement also provided some relief to potential homebuyers. During that time, mortgage rates plunged to a two-year low, reflecting how lenders try to price in expected rate changes before they happen. And with the bigger-than-expected Fed rate cut, the potential for further declines in mortgage rates also appears possible, giving homebuyers and homeowners a much-needed respite.

But while the Fed’s actions influence mortgage interest rates, it’s important to understand that they aren’t the only thing that plays a role. Mortgage rates are driven, in large part, by factors beyond the Fed’s direct control. So borrowers should understand what else could have an impact on where these rates head now and in the future.

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6 things that impact mortgage interest rates (besides the Fed)

Here are some key factors that will help influence where mortgage rates head next.

Inflation trends

Inflation is one factor that plays a significant role in determining mortgage rates. When inflation is high, lenders typically raise interest rates to compensate for the eroding value of money over time. On the other hand, when inflation slows, mortgage rates tend to fall. 

While the Fed’s rate decisions are partly aimed at keeping inflation in check, other factors — such as energy prices, global supply chain issues and wage growth — could also have an impact on inflationary pressures. Should inflation remain contained or continue to decline in the coming months, this could put downward pressure on mortgage rates, providing further relief to borrowers.

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Labor market conditions

A strong or weakening labor market can also sway mortgage rates. For example, if job growth is robust and wages rise, it could fuel consumer spending and economic growth, which might lead to higher inflation and push mortgage rates up. Conversely, if the labor market shows signs of slowing or weakening — whether it’s due to layoffs or stagnating wages — it could dampen inflationary pressures and support lower mortgage rates. 

Recent employment data has already indicated that the job market is slowing faster than expected. If that trend continues, it could benefit homebuyers, as it could lead to further declines in mortgage rates in the coming weeks. 

U.S. Treasury yields

Mortgage rates closely track the yields on U.S. Treasury bonds, particularly the 10-year Treasury note. When investors buy U.S. Treasuries as a safe haven during times of economic uncertainty, Treasury yields drop, and mortgage rates tend to follow suit. Conversely, when yields rise — typically due to investor optimism about the economy — mortgage rates tend to rise as well. 

Treasury yields are influenced by a wide range of factors, from global economic conditions to U.S. fiscal policy, making them a critical indicator for where mortgage rates might head next. So, any significant movement in Treasury yields could signal a shift in mortgage rates.

Global economic trends

Global economic uncertainty can also impact mortgage rates. For example, geopolitical tensions, trade disputes or economic instability in major regions can lead to a “flight to safety,” where investors flock to U.S. bonds, causing Treasury yields — and, subsequently, mortgage rates — to fall. 

On the other hand, positive news in the global economy or a resolution of trade issues could ease investor concerns and lead to rising rates. So, keep an eye on key international developments, such as trade negotiations or central bank policy decisions abroad, that could ripple through the financial markets and influence mortgage rates.

Housing market demand

Mortgage rates can also be influenced by supply and demand dynamics in the housing market. If housing demand surges, lenders may respond by tightening lending standards or raising rates to manage the flow of applications. If demand wanes, lenders might lower rates to attract more buyers. 

As we enter late fall, seasonal patterns in the housing market may also play a role. This time of the year tends to bring a slowdown in homebuying activity compared to the busy spring and summer months, which could affect lenders’ rate-setting decisions.

Federal Reserve policy outlook

The Fed’s policy outlook for the remainder of the year will also continue to influence mortgage rates. Markets are constantly assessing the Fed’s next moves based on economic data, inflation reports and statements from Fed officials. 

If the Fed continues to signal more rate cuts going forward, it could push mortgage rates even lower. However, if the central bank switches to a wait-and-see approach, mortgage rates could stabilize or even inch upward again. So, while future benchmark rate cuts are expected, the upcoming Fed meetings and economic assessments will be pivotal for setting market expectations.

The bottom line

The Federal Reserve’s larger-than-expected rate cut is a promising start, but other factors will help shape the direction mortgage rates take in the coming weeks and months. So, borrowers hoping to lock in a lower rate will need to stay informed, tracking how these forces interact and influence the market. As we enter a more unpredictable phase of the economy, understanding the bigger picture is key to navigating mortgage rate fluctuations.