Relatively Stable Weekly Mortgage Rates Need a Reason to Truly Drop

Mortgage rates moved slightly lower this week, but not enough to motivate most buyers. The average rate on the 30-year fixed-rate mortgage fell five basis points to 6.79% the week ending Feb. 20, according to rates provided to NerdWallet by Zillow. A basis point is one one-hundredth of a percentage point.

It’s the lowest average we’ve seen so far this year, but mid-January’s peak was only about a quarter of a percentage point higher. You could argue that we’re in a relatively static period for mortgage rates: Over the past year, the average rate on a 30-year, fixed-rate mortgage has mostly ranged between 6.5% and 7%.

So how likely is it that mortgage interest rates will meaningfully drop? Looking at the actions — and inactions — of the Federal Reserve could give us some clues.

The Federal Reserve is one potential source of downward pressure. Last fall, the Fed began lowering the federal funds rate, which is the interest rate it actually controls. We talk about the Fed lowering rates, plural, because changes to the funds rate have significant effects on other interest rates, including mortgage rates.

One of the Fed’s main goals is a 2% rate of inflation. When inflation’s rising too quickly, the bankers move to raise interest rates and depress borrowing. A slow rate of inflation, on the other hand, can prompt the Fed to lower interest rates in the hopes of loosening up wallets. At its most recent meeting in January, the Fed paused the campaign of rate cuts that began in September.

Minutes from that meeting were released this week, showing the Fed governors aren’t in agreement over inflation. Some contend that inflation seems to be in check. But the views making headlines are those of governors concerned that the new administration’s policies around trade and immigration could spur inflation.

This generated buzz not only because those are hot policy topics, but because the worriers have been proved right based on recent data releases. The most recent Consumer Price Index, a key measure of the rate of inflation, showed that inflation sped up in January. At least for now, the outlook for a rate cut at next month’s Federal Reserve meeting is pretty bleak.

Another notable moment in the Fed minutes pointed toward a different scenario that would affect mortgage interest rates. It’s a bit more complicated to explain than the federal funds rate, so bear with us.

The Federal Reserve also influences interest rates by buying and selling bonds. When the Fed’s in buying mode, the purchases send more money into the economy, driving rates down. When the Fed sells, money’s going out of the economy and into reserves, pushing rates up.

During the pandemic, the Federal Reserve moved to bolster the economy by buying trillions of dollars in Treasury bonds and mortgage-backed securities (MBS). MBS are more or less what they sound like: pools of similar mortgages that can be traded. These major purchases helped support the Fed’s emergency rate cut, which drove mortgage rates to record lows.

Mortgage rates are usually low when MBS prices are high, but with COVID upending the economy, investors weren’t exactly clamoring to buy. The Federal Reserve stepping in as a buyer allowed for lower mortgage interest rates. As the economy regrouped, in 2022 the Fed shifted away from buying bonds and MBS. (Though not actively selling, the Fed switched to a balance sheet “runoff” by not reinvesting funds as the securities mature.) With that guaranteed buyer out of the market, demand for MBS moved lower and mortgage rates went higher.