Weekly Mortgage Rates Climb as Inflation Anxiety Builds

This week, markets have been bracing for the latest Consumer Price Index, an inflation report coming Sept. 11 from the U.S. Bureau of Labor Statistics. While it’s a routine monthly report showing August data, this one feels especially high stakes. The Federal Reserve meets next week on Sept. 15-16, and if consumer inflation comes in above the Fed’s 2% target, markets may become even more convinced that the Fed will raise its benchmark interest rate in an effort to keep inflation under control.

Markets currently see about a 70% chance of a quarter-point hike, according to CME FedWatch.

A strong jobs report gives the Fed room to hike

As the Iran war pushes energy prices higher, it seems obvious that inflation will remain elevated. Economists expect the August CPI report to show annual inflation remaining similar to its rate of 3.4% in July. But there’s still a chance we could be surprised. After all, the latest jobs report from the Bureau of Labor Statistics showed that total employment grew by 162,000 in August — three times what economists expected.

If the job market looked shaky, the Fed might be more hesitant to raise rates. Right now, it has a little more breathing room.

“We know that the committee's teetering between continuing to hold the funds rate steady and hiking a quarter of a percentage point,” says NerdWallet lending expert Kate Wood. “Exactly how much the rate of inflation changed in August could easily push the vote one way or the other.”

The Fed doesn’t directly set mortgage rates, but its decisions shape the broader lending market. Mortgage rates tend to rise or fall in anticipation of the Fed’s next move, but these days, that’s harder to gauge under the Fed’s tight-lipped chairman Kevin Warsh. Still, mortgage markets have been factoring in a likely rate hike in this week’s pricing.

For home buyers, that means there may be more upward pressure on mortgage rates before there’s meaningful relief.

The bond market isn’t buying it

When inflation looks likely to stick around, bond investors generally demand higher returns to make up for the purchasing power inflation eats away. Market forces often move mortgage rates in the same direction as yields on Treasury notes, so that can mean higher borrowing costs for home buyers.

This week brought another wrinkle when the Treasury Department said it will increase its long-term bond buybacks to $6 billion per operation this quarter — triple the amount it originally planned. Buying back bonds can, in theory, help ease upward pressure on yields. But investors weren’t particularly reassured. Bigger-picture concerns about government borrowing and persistent inflation are still weighing on bonds.

You don’t need to understand the mechanics of a Treasury buyback to get the big picture here: Bond markets have been jumpy lately, and home buyers should expect mortgage rates to stay jumpy, too.

August’s CPI steps onto a tough court

So, with real and anticipated inflation pressure, will the Fed raise rates next week or not?

Think of the Fed as the coach of a fifth-grade basketball team, putting together a roster after a string of truly embarrassing tryouts. August’s jobs report showed some surprising hustle, but energy prices keep racking up fouls and the bond market just airballed a layup.

August’s CPI report is another key player to evaluate — but no one’s betting it can save the season.

If you’re hoping to buy a house this fall, don’t count on mortgage rates getting cheaper anytime soon. If you’re shopping now, focus on the rate you can actually get rather than trying to predict the Fed. Compare offers from at least three lenders, and look at the monthly payment to decide how much house you can afford. If rates eventually ease, refinancing may give you another shot at a lower rate later.

The article Weekly Mortgage Rates Climb as Inflation Anxiety Builds originally appeared on NerdWallet.