Earlier this week, Federal Reserve Chairman Jerome Powell announced the central bank was leaving interest rates unchanged. Then, he was asked if lowering rates would bring relief to the housing market.
“We do have an effect, but we're not the main effect,” he said. “I think the best thing that we can do for housing is to have 2% inflation and maximum employment … That’s what we can contribute to housing.”
Powell's comments were a disappointment to many in the real estate community who were hoping Fed action might help push down the nation's stubborn mortgage rates.
On Thursday, new data from mortgage giant Freddie Mac — which buys loans from banks, bundles them into securities and sells them — showed mortgage rates still trapped in the same narrow range they have been stuck in for months. The weekly 30-year, fixed-rate mortgage average had slightly decreased to 6.72%, the firm said, staying within a 0.13 percentage point range.
President Donald Trump has led a chorus of people calling on Powell to lower rates, suggesting that it would help homeowners and borrowers.
In a post on his social media platform Truth Social ahead of Wednesday’s Fed meeting, the president wrote that Powell “MUST NOW LOWER THE RATE. No Inflation! Let people buy, and refinance, their homes!”
Technically, the Fed does not set mortgage rates. But the rates it does set — governing the interest rate charged by banks to borrow from each other overnight — acts as a powerful benchmark for many lenders.
The Fed is focused on inflation and the job market
Helping the housing market is not an explicit part of the Federal Reserve's mandate. Instead, it is tasked with creating policy that achieves maximum employment and stable prices, typically measured by the unemployment and inflation rates.
“There's nothing in there that directly addresses somehow managing the mortgage rate market in the U.S.,” Ken Johnson, the Walker Family Chair of Real Estate at the University of Mississippi, told Homes.com in an interview. “The idea is that would seemingly flow from those two mandates.”
Mortgage rates tend to be much more closely tied to the supply and demand of 10-year Treasury bonds — loans that investors make to the government.
Investors make decisions about the bond market based on how risky the U.S. government debt appears, according to Johnson.
“Right now, there is a weakness in the demand for treasuries, especially from foreign investors,” he said. “They're seeing the debt levels in the U.S. rise, so there’s less interest. It's just as if you were loaning money to someone, and they told you they had more debt rather than less debt, you would not loan that money at such a low rate. You would perceive risk.”
And perceptions of government debt, and the U.S. economy at large, can be influenced by Federal Reserve decisions.
“Historically, wanting to cut rates is a very strong signal overall to financial markets that the U.S economy is strong and is getting stronger,” Johnson said. But he noted that it wouldn’t be an instantaneous change. It would take time for investor confidence to grow and reflect in the market.
And that confidence might also include a sense that the Fed is acting independently, free from any political pressure, he said.
“If investors see the Fed as not being independent of other political influences in the U.S., the current administration included in that, then the market will not perceive [Fed action] as a credible signal,” Johnson said.
Lower interest rates could mean higher housing inflation
More than that, reigniting the housing market with lower interest rates could backfire on the central bank’s actual mandate to keep inflation as close to 2% as possible.
Johnson suggested that if interest rates — and in turn, mortgage rates —ease, that could spark new home price growth, a big contributor to overall inflation in the U.S.
“My gut feeling: that is one of the Fed’s biggest fears, because housing is a big component of our inflation measure, and that falls under their mandate,” he said.
Borrowers might be especially sensitive to that kind of movement right now, too, because of a shortage of housing supply, as Powell noted on Wednesday.
“There are other things … going on in the housing sector,” Powell said. “And one of those is just there's kind of a long-term housing shortage that we have. We haven't built enough housing. This is not something the Fed can help with … That’ll be the case even after things normalize.”
Even with that risk, some have suggested that mortgage rates are disproportionately affecting the housing market right now. In June, Lawrence Yun, chief economist at the National Association of Realtors, described mortgages as "the magic bullet" to boosting markets.
Since then, home price growth has slowed across much of the country as the number of for-sale houses increases. It's created a new mismatch in the market as buyer choice grows, but consumers remain handicapped by elevated mortgage rates. If that trend continues, it could create even greater disruptions in the market.
"We are just waiting and waiting as to when that could come down," Yun said in June.
There's an ongoing battle with uncertainty
Perhaps more than anything, though, Powell’s comments seemed to confirm what the market has known to be true for some time: uncertainty in the economy is likely here to stay for some time.
There were no major changes to mortgage rates immediately following Wednesday’s news, according to Matthew Graham, chief operating officer at Mortgage News Daily.
“The afternoon's Fed announcement did nothing to change the bigger picture, although it did result in lower expectations for Fed rate cuts by the end of the year,” he wrote in a blog post. “The underlying bond market merely returned to the same levels from this morning and most mortgage lenders kept rates unchanged.”
In the short term, data about the jobs report and inflation set to be released at the end of this week could play a bigger role in where mortgages go.
It's hard to compare to previous Federal Reserve interest rate cuts, too, economists have suggested. Broader economic policy is different this year than last year, for example, when investors expected a September interest rate cut and baked that into the mortgage market in the weeks leading up to the decision.
"If a September rate cut starts to be more likely, it is possible that we could see mortgage rates edge downward at the end of the summer, similar to what we saw last year at this time," Lisa Sturtevant, chief economist at Bright MLS, said in a statement on Thursday. "But it is a very different housing market and economy than it was a year ago."
“There is no doubt that there's more uncertainty in the overall financial markets,” Johnson added. “We're doing things differently now. And not that it’s right or wrong. It's just new.”
