CHM Blog

A hike looks likely. The debate isn't over.

Ninety percent. That's roughly where prediction markets now put the odds of a Fed rate hike this week, and it happened almost overnight. This is all thanks to one report last Friday morning.

Snejana Farberov's reporting for Realtor.com breaks down exactly what shifted, and why the Fed's own read on the data might be messier than the odds suggest. The Consumer Price Index for August showed prices rose 3.4% annually, unchanged from the prior month. But the monthly number told a different story. Prices jumped 0.4% from June, a sharp acceleration from the previous month's tepid 0.1% gain. That single data point, released just days before the Federal Open Market Committee's two-day meeting, sent the probability of a September hike surging past 90% on CME's FedWatch tool. Prediction marketplace Kalshi is a touch more conservative, pricing the odds at 75%.

The Fed's benchmark rate has sat unchanged since December, and a hike would mark the first increase in 3 years, with real consequences for housing. Though the Fed technically operates under a dual mandate covering both price stability and employment, Chair Kevin Warsh and the broader committee have kept their attention almost entirely fixed on inflation lately, sidelining labor market data that would normally carry equal weight.

Realtor.com senior economist Jake Krimmel offers a more skeptical read on what this report actually settles. He describes it as something close to a Rorschach test for the FOMC, a report vague enough that both camps within the Fed can find support for whatever they already believed.

Core inflation, which strips out volatile food and energy prices and gets watched especially closely by both the Fed and financial markets, rose 0.3% month over month, beating expectations, even as the annual core rate cooled to 2.4% from July's 2.5%, marking three straight months of improvement. "The Fed's hold camp, Gov. Chris Waller among them, gets cover from a core rate that's now cooled to 2.4% year over year," Krimmel says. "The hike camp can feel their position confirmed too, with monthly core up 0.3%."

Warsh himself seemed to anticipate this kind of split reading. In his opening address at Jackson Hole, he cautioned against leaning too heavily on any single data point, arguing that trends matter more than isolated numbers.

Digging into the details reveals where most of the pressure actually came from. Gasoline prices jumped 3.9% for the month, accounting for more than a third of the entire headline inflation increase. Annually, gas prices have surged 27.4%, largely a reflection of the energy shock tied to the ongoing conflict between the US and Iran. Housing costs added their own pressure, rising 0.3% from July and 3% over the past year. The timing compounds the concern. This report landed just a day after Freddie Mac reported that the 30-year fixed mortgage rate hit a 15-month high, pushed upward by surging 10-year Treasury yields.

Krimmel argues the real significance of this CPI report extends well past how the Fed chooses to interpret it. "It's about headline inflation over core; price levels over annual inflation rates; and 30-year mortgage rates over short-run rates," he says. By any of those three measures, the signals households are actually experiencing are all moving in the wrong direction, regardless of which way the Fed ultimately leans.

For housing, that combination raises the stakes heading into fall. What's already been a slow late summer, marked by pending sales turning negative year over year and existing home sales hitting their lowest point of the year in August, risks tipping into a genuine September stall.

Krimmel's bottom line for this week's meeting: "Regardless of how the CPI report influences the Fed decision, households and the housing market need a path toward lower inflation, for purchasing power, consumer confidence, and lower mortgage rates next year.”

Realtor, TBWS

How Rates Move:

Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I'm among few mortgage professionals who have access to live trading screens during market hours.

Rates Currently Trending: Neutral

Mortgage rates are moving higher today. The MBS market worsened by -106 bps last week. This was enough to increase mortgage rates or fees. The market experienced high volatility last week.

This Week's Rate Forecast: Higher

These are the three things that have the greatest ability to impact rates this week. 1) The Fed, 2) Oil and 3) Central Banks.

1) The Fed: There is a lot weight on Wednesday's FOMC meeting with the long bond market hedging for a 25BPS hike after last week's PPI and CPI data (as well as a huge surge in oil). But there is still a strong potential for a "hold" with several dissenting votes (Waller and Bowman at least). This is also a meeting where we get their Summary of Economic Projections from which the famous "dot plot chart" is derived. The bond market will be very sensitive to future inflation and interest rate projections.

2) Oil: We start the week off with a key oil pipeline being attacked and taken offline which already has WTI up almost three bucks.

3) Central Banks: The next central bank up is Bank of England on Thursday.

This Week's Potential Volatility: High

This morning markets have started under very heavy pressure. Volatility has started high and could stay that way all week.

Bottom Line:

If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.

Richard Sardella has been actively managing and providing services in the mortgage industry for over 30 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.

All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.

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