With the Fed on Hold, Could Mortgage Rates Still Reach 7.5%?

This article was first published on NerdWallet.com.

The Federal Reserve said it would keep the federal funds rate unchanged, a move that matched what markets had already expected. Even so, mortgage rates may not settle immediately in response.

The average rate on a 30-year fixed mortgage fell 10 basis points to 7.17% APR in the week ending Oct. 28, according to rates supplied to NerdWallet by Zillow. A basis point equals one-hundredth of a percentage point. The weekly average is based on daily APRs recorded over the previous five business days.

Why this was largely expected

The central bank has two main policy goals: bringing inflation back toward 2% and supporting maximum employment. When inflation runs too hot, the Fed can lift the federal funds rate, which tends to push up consumer borrowing costs, including mortgage rates. When unemployment rises too much, it can cut the rate to make borrowing cheaper for businesses and encourage hiring.

With the latest jobs report showing employment remained relatively stable, inflation has become the main focus.

Despite the Fed chair's typically guarded comments in the lead-up to the meeting, and despite preliminary September inflation readings that had been running hot, futures traders were broadly convinced the central bank would leave rates unchanged after the previous hike.

Could mortgage rates remain under 7.5%?

Not necessarily. Rates can change quickly, even from one day to the next.

One likely market mover is the Personal Consumption Expenditures price index, or PCE, which was scheduled for release the following day. This is the Fed's preferred inflation gauge. Because policymakers did not have that data when they voted, that may have been one reason they held off on another change to the federal funds rate.

If the PCE report shows inflation moving higher, mortgage rates could rise over the next several weeks as lenders try to guard against a weaker dollar. Higher inflation would also strengthen the case for another rate increase at the Fed's next meeting. Futures traders tracked by CME FedWatch were seeing a strong chance of an increase at the next decision point.

There is also reason to expect the inflation reading could come in elevated. The latest monthly Consumer Price Index, or CPI, showed annual inflation rising to 3.7%.

Of course, mortgage rates are influenced by many forces. Oil prices, the bond market, and major global or domestic developments can all affect them in unpredictable ways. But if analysts keep betting on another Fed hike, borrowers should be prepared for higher mortgage rates in the near term.

So far, 30-year mortgage rates have averaged 7.3% for the month, up from 6.98% the month before. At that pace, rates could reach 7.5% this year, a monthly average not seen since October 2023.

Why higher rates are not necessarily the worst outcome

If the Fed raises the federal funds rate again, the goal would be to cool inflation temporarily.

That may feel painful in the short run, but bringing inflation under control can help create room for lower rates later. Slower inflation can also ease prices for essential goods, leaving home buyers with more money available for a monthly mortgage payment.

The article As Fed Holds Steady, Are 7.5% Mortgage Rates Still Possible? originally appeared on NerdWallet.