There is an argument going around that if the Fed raises rates, long-term rates will fall.
That includes things like 30-year mortgage rates, which just hit a 52-week high.
Basically, the Fed’s hike will send a signal to the bond market that new Fed chairman Kevin Warsh is serious about fighting inflation.
Therefore, long-term bond yields may decline.
And loan rates can ease at the same time.
Do Mortgage Rates Need to Go Up?
A recent Bloomberg article cited a note from a Wells Fargo economist about this idea.
“So, one thing we’ve heard in general from those who think the Fed will raise rates as soon as next week is that, by raising rates, Warsh (and by extension Bessent) will get what they want in the end: to keep rates back down.”
“The thinking is that by walking, Warsh will strengthen his anti-inflation credentials and take out the inflation built up at the bottom of the stock market.”
The argument here is Warsh’s rise to deal with inflation and loosen his predecessor’s supposedly masculinist policies.
And in doing so, bond yields fall and mortgage rates fall.
Bond investors no longer need to hedge against rising interest rates on the books.
It’s a counterintuitive thought, but you can see where it makes sense.
With the new Fed talking about a recent hike in inflation, bonds may finally take a breather.
But remember that the Fed does not set loan rates.
They control short-term rates, especially overnight lending rates.
In contrast, mortgage rates are long-term, typically 30-year fixed.
As the name suggests, it lasts for a full thirty years.
So even if the Fed were to hike, mortgage rates would move in a different direction.
To that end, mortgage rates are more sensitive to inflation due to their longer duration.
If inflation is expected to worsen, the value of those mortgages will decrease over time.
If the Fed gets serious about inflation, that makes those mortgages more valuable in theory.
It means the dollar will not erode as quickly and the return on holding those mortgages as an investor will improve.
What will Trump think?
While this all sounds like self-delusion, there is the matter of the President.
Many say Warsh was hired by President Donald Trump to cut rates.
Trump campaigned to bring back low mortgage rates.
He even said that they might be lower than before.
So if the Fed hikes again, Trump can go into a tizzy if he feels that is at risk.
Explaining how it could actually benefit housing prices, and perhaps the broader economy, would be a tall order.
However, if mortgage rates respond as expected and fall, they may not attack Warsh as they did Powell.
Of course, this is just one factor to consider. And there are many other issues at play, namely the Middle East conflict.
That’s still a biggie in terms of getting a real bottom move in a 30 year plan.
If we want the lowest mortgage rates, we need to solve that.
