There’s an argument floating around that if the Fed hikes rates, long-term rates will move lower.
That includes things like 30-year fixed mortgage rates, which recently hit fresh 52-week highs.
Basically, a Fed hike will send a signal to the bond market that new Fed chair Kevin Warsh is serious about combating inflation.
As such, longer duration bond yields could come down.
And mortgage rates could ease at the same time.
Do Mortgage Rates Need a Hike?
A recent Bloomberg article cited a note from a Wells Fargo economist regarding the theory.
“So, one thing we have heard with great regularity from those who think the Fed will hike rates as soon as next week is that, by raising rates, Warsh (and by extension Bessent) will get what they ultimately really want: back-end rates to move lower.â€
“The thinking goes that by hiking, Warsh will firm up his inflation fighting cred and squeeze out the inflation premium built into the back end of the rates market.â€
The argument here is Warsh hikes to tackle inflation and unwind his predecessor’s supposedly dovish policy.
And in doing so, bond yields drop and mortgage rates come down as well.
Bond investors no longer have to be as defensive with a rate hike in the books.
It’s a counterintuitive thought, but you can see where it makes sense.
With the new Fed actually addressing the recent uptick in inflation, bonds can finally take a breather.
But remember that the Fed doesn’t set mortgage rates.
They control short-term rates, specifically overnight lending rates.
Conversely, mortgage rates are long rates, especially the 30-year fixed.
As the name suggests, it lasts for a full three decades.
So even if the Fed were to hike, mortgage rates could move in a different direction.
To that end, mortgage rates are more concerned with inflation because of their long duration.
If inflation is expected to worsen, the value of those mortgages will diminish over time.
If the Fed gets serious about inflation, that makes those mortgages more valuable in theory.
It means the dollar won’t erode as quickly and the return for holding those mortgages as an investor will improve.
What Will Trump Think?
While this all sounds hunky-dory, there’s the matter of the President.
Many say Warsh was hired specifically by President Donald Trump to cut rates.
Trump ran a campaign on bringing back record low mortgage rates.
He even went as far as to say they could even go lower than they have been previously.
So if and when the Fed hikes, Trump could get in a tizzy if he feels that’s under threat.
Having to explain that it could actually benefit mortgage rates, and maybe even the wider economy, could be a tall task.
However, if mortgage rates responded as expected and fell, he might not attack Warsh as he did Powell.
Of course, this is but one factor to consider. And there are many more issues at play, namely the Middle East conflict.
That’s still the biggie in terms of getting real downward movement on the 30-year fixed.
If we want significantly lower mortgage rates, we need to solve that.
