Author: Eric BernsteinPublished:
Last week was a volatile one. We saw mortgage rates surge higher on Monday and Tuesday and fall from Wednesday to Friday. The result was that mortgage rates were fairly flat on the week and with mortgage rates down slightly today, many are now wondering if we've seen the most recent peak for mortgage rates as news out this weekend shows a deal with Iran could be days away.
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April Fed Meeting Minutes Shows a More Hawkish Fed
The Fed minutes were not great for anyone hoping mortgage rates would fall quickly. Instead of showing a committee preparing to cut rates, they showed more Fed officials worried that inflation is still too high and may require a tougher stance.
The biggest concern is that the Iran war is pushing energy prices higher, and those costs could start spreading into the broader economy. A majority of policymakers said that if inflation stays above the Fed’s 2% target, more “policy firming” could become appropriate. Essentially, another rate hike is not off the table.
The meeting was also unusually divided. Four policymakers dissented, which is the most since 1992. One wanted a rate cut, but three others pushed back against language that suggested the Fed may still cut later this year. That tells us the conversation inside the Fed has shifted. A few weeks ago, markets were debating when cuts would happen. Now, the debate is whether cuts are still likely at all.
That creates a tough dynamic for incoming Fed Chair Kevin Warsh. Trump wants lower rates, and Warsh has been viewed as more open to cuts, but he is inheriting a Fed that looks more concerned about inflation than weakness in the economy.
For mortgage rates: lower rates need softer inflation or a weaker labor market. Until one of those shows up clearly in the data, markets may be less willing to bet on Fed cuts, which could keep mortgage rates under pressure.
Iran Deal Progress Gives Markets Some Relief
There was finally some progress on the Iran conflict this week, though no one should confuse progress with a done deal. Marco Rubio said a deal could still take “a few days,” and both sides are playing down the idea that an agreement is imminent. But the fact that Iran and U.S. officials are actively discussing a memorandum of understanding is a meaningful step forward after months of escalation.
The early framework would reportedly focus on halting the war, reopening shipping through the Strait of Hormuz, and giving negotiators more time to work through the bigger issues, including Iran’s nuclear program. That matters because the Strait of Hormuz is one of the most important energy chokepoints in the world, and disruptions there have been a major reason oil prices surged this spring.
Markets liked the progress. Oil prices fell about 3% on the news, which is a good sign for inflation and mortgage rates because lower energy prices can help reduce pressure across fuel, transportation, fertilizer, and food. But oil is still hovering around $90 per barrel, which is roughly 40% to 50% higher than before the conflict began and still well above where it was in early May, when prices were closer to $80.
So this is good news, but nothing we haven't seen before. A real deal would take pressure off oil, inflation, and ultimately rates. But as long as oil remains near $90 and the conflict is unresolved, the Fed still has a reason to stay cautious. Realistically, Warsh needs the war to end if he wants to cut rates.
What to expect this week?
After last week’s heavier reporting, markets get a shorter holiday week, but Friday could still be important for mortgage rates.
Monday - markets were closed for Memorial Day.
Tuesday brings home price data and consumer confidence. Neither is likely to dominate the week, but confidence will give us a quick read on whether consumers are starting to feel more pressure from higher prices, higher rates, and economic uncertainty.
Wednesday has no major reports scheduled.
Thursday gives us jobless claims, durable-goods orders, and new home sales. Jobless claims will matter most because any signs of a softer labor market could help the case for lower rates later this year. New home sales will also be worth watching as builders continue trying to pull buyers back into the market with price cuts and incentives.
Friday is the big one. The Fed’s preferred inflation gauge, PCE, comes out alongside GDP, personal income, and personal spending. If inflation comes in hotter than expected, mortgage rates could move higher. If it comes in cooler, it could give buyers a little relief heading into June. However, a deal with Iran could diminish the impact of PCE reporting as markets would be looking ahead to better numbers.
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