Mortgage Rates Higher After The Fed Holds. Hikes Are Back in Play

The Fed Holds, But Rate Hikes Are Back on the Table

The Federal Reserve kept its benchmark rate unchanged at 3.5% to 3.75% last week, but this was hardly a comfortable hold. Three officials voted to raise rates, the most dissenters at a Fed meeting since 2016. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan all argued that inflation remains too high and monetary policy should be tighter.

Fed Chair Kevin Warsh did little to clarify what comes next. He argued that borrowing costs have already moved higher on their own, meaning the Fed may not need to raise its benchmark rate right away. But investors were left unsure whether the Fed is truly comfortable holding steady or simply delaying another hike.

Warsh also took a clear shot at the previous Fed, saying there is no “soft” or unofficial inflation target above 2%. In other words, he suggested the last group may have become too comfortable with inflation running hotter than promised. He insisted this Fed is serious about getting inflation back to 2%, but he would not explain exactly what would force it to act. The message was clear: the Fed did not raise rates last week, but higher rates are still very much on the table.

To be blunt, the takeaway for mortgage rates is not encouraging. The Fed may have held steady, but a meaningful group of policymakers already believes rates should be higher, and Warsh openly acknowledged that tightening could become necessary if inflation persists. The next several inflation reports will determine whether the dissenters gain support. For now, rate cuts appear off the table, while another increase is a real possibility.

Inflation Finally Cools, But July Could Reverse the Progress

June’s PCE report delivered some much-needed good news. Headline inflation fell 0.1% during the month and slowed from 4.1% to 3.7% annually. Core PCE, which removes food and energy, rose just 0.1% and eased to 3.3% annually. Inflation is still well above the Fed’s 2% target, but the monthly numbers were encouraging and showed that price pressures cooled meaningfully as energy costs fell and housing inflation moderated.

The concern is that June’s improvement may already be outdated. Much of the decline came while oil and gasoline prices were falling during the temporary ceasefire with Iran. Renewed fighting sent oil sharply higher again in July, with Brent crude climbing back above $90 per barrel and gasoline returning above $4 per gallon. Those increases will likely show up in the next inflation report and could erase some of June’s progress.

However, developments over the weekend created some cautious optimism that the next report may not be as bad as feared. President Trump called off a planned strike on Iran and there are reports that a deal to reopen the Strait of Hormuz could be close, sending oil prices sharply lower. That could help ease some of the inflation pressure created by July’s surge in energy prices. But we have seen peace talks fall apart before, and Iran has already disputed Trump’s claim that direct negotiations were set to begin.