The Federal Reserve is widely expected to raise interest rates Wednesday after hotter August inflation abruptly reversed economists’ forecasts. For mortgage professionals, however, the expected quarter-point hike may not be the most important part of the announcement.
Markets have already priced in a high probability of a rate hike. The bigger questions for mortgage rates are what Fed officials project for the remainder of the year, how Chair Kevin Warsh characterizes the inflation outlook, and whether the decision reassures or unsettles the long-term bond market.
The Fed does not set mortgage rates directly. Mortgage pricing responds more closely to longer-term Treasury yields, inflation expectations, and demand for mortgage-backed securities. A Fed hike therefore would not automatically produce an equal increase in 30-year mortgage rates.
“Strong job growth and firmer inflation have tilted the Fed toward a September rate hike, with recent data pushing Treasury yields and mortgage rates to one-year highs,” First American Senior Economist Sam Williamson said. “For home buyers, the key question is whether Fed action can eventually calm bond yields and open the door to mortgage-rate relief, even if borrowing costs remain elevated for now.”
The Federal Open Market Committee begins its two-day meeting Tuesday and will release its policy decision at 2 p.m. ET Wednesday. The meeting will also include an updated Summary of Economic Projections, showing policymakers’ expectations for inflation, economic growth, unemployment, and the federal funds rate.
Economists Reverse Their Forecasts
An overwhelming 85% of economists surveyed by Reuters after Friday’s inflation report — 86 of 101 — now expect the Fed to raise its target rate by a quarter percentage point, to a range of 3.75% to 4%.
That represents a sharp reversal from a Reuters poll completed before the Consumer Price Index report, when more than two-thirds of economists expected the Fed to hold rates steady.
Interest-rate futures Monday indicated an approximately 90% probability of a quarter-point increase, according to CME FedWatch data cited by Reuters. Goldman Sachs, JPMorgan, HSBC, and Deutsche Bank are among the financial institutions now forecasting a hike.
If approved, it would be the Fed’s first rate increase since July 2023 and its first under Warsh.
The outlook has also shifted beyond Wednesday. Nearly 53% of economists who provided longer-term forecasts expect at least one additional increase by the end of March, while financial markets are pricing in several increases through July 2027.
August CPI Reverses Some Of July’s Progress
The Consumer Price Index increased 0.4% in August after rising 0.1% in July, according to the Bureau of Labor Statistics. Consumer prices were 3.4% higher than a year earlier, unchanged from July’s annual rate.
The headline monthly increase matched economists’ expectations, but underlying inflation was firmer than anticipated. Core CPI, which excludes food and energy, increased 0.3% after a 0.2% gain in July. Economists had generally expected another 0.2% increase.
Annual core inflation eased from 2.5% to 2.4%, providing some evidence that underlying price pressures have moderated over the longer term. The stronger monthly reading, however, weakened confidence that inflation is moving consistently toward 2%. The Fed formally targets inflation measured by the Personal Consumption Expenditures price index, not CPI.
Energy was a major contributor to the headline increase. Gasoline prices rose 3.9% in August and accounted for more than one-third of the overall monthly increase. The broader energy index increased 2.1% during the month and 16.3% from a year earlier.
Shelter costs rose 0.3% in August, up from 0.1% in July. Rent and owners’ equivalent rent each increased 0.2%.
The report reversed some of the reassurance provided by July’s softer inflation reading. As NMP reported last month, July reduced the risk that renewed inflation would force borrowing costs sharply higher without establishing a clear path toward mortgage-rate relief.
Why A Fed Hold Would Not Guarantee Lower Rates
The most direct effect of a Fed hike would be felt in short-term and variable-rate borrowing, including credit cards and most variable-rate home equity lines of credit.
Its effect on fixed mortgage rates is less direct.
Long-term bond investors are focused on whether the Fed can keep inflation expectations anchored while energy prices remain elevated and heavy Treasury issuance adds pressure to the bond market. The 10-year Treasury yield has approached 5%, increasing pressure on mortgage pricing even before the Fed’s decision.
Some investors believe a surprise decision to hold rates steady could weaken confidence in the Fed’s inflation response and cause investors to demand higher yields for holding longer-term Treasury debt.
A hike accompanied by a credible inflation message could steady longer-term yields. A hike paired with projections for several additional increases could push borrowing costs higher. A hold could help bonds if the Fed provides a convincing rationale, or hurt them if investors interpret it as a retreat from the central bank’s inflation warnings.
What Originators Should Watch
The average 30-year fixed mortgage rate rose 5 basis points to 6.76% during the week ending Sept. 10, according to Freddie Mac. The 10-year Treasury yield finished Friday near 4.96% after approaching 5% during the session.
Williamson said the Fed’s updated Summary of Economic Projections could prove pivotal. The median projection released in June showed one rate increase by the end of 2026, but stronger employment and inflation data since then could lead officials to project another.
“That higher-for-longer path could keep upward pressure on long-term Treasury yields, which mortgage rates tend to follow, limiting near-term relief for prospective home buyers,” Williamson said.
Wednesday’s announcement could produce additional repricing, but the headline decision will not tell originators everything they need to know. The market will also be watching:
- Whether the vote reveals meaningful disagreement among policymakers;
- How many officials project another increase before the end of 2026;
- Whether the Fed raises its inflation forecasts;
- What Warsh says about energy prices and core inflation; and
- How Treasury yields and mortgage-backed securities respond after the statement and press conference.
The Fed held rates steady in July despite three policymakers dissenting in favor of an increase. Warsh considered inflation too high and offered little guidance about what would come next.
Wednesday could resolve the immediate question of whether the Fed will raise its benchmark rate. For originators and borrowers, the more consequential answer will be whether policymakers signal that additional increases are coming — and whether the bond market believes the Fed is doing enough to control inflation.
