• Key Insight: How shifting FOMC rate expectations enhance market pessimism for mortgage lenders.
• What's at Stake: Potential homebuyers whose purchasing power faces erosion from persistently high borrowing costs.
• Forward Look: Watch for a potential Federal Open Market Committee rate hike in October. 

 Overview bullets generated by AI with editorial review. 

The hotter-than-expected Consumer Price Index reading for September makes it even more unlikely mortgage rates will be coming down anytime soon.

This news "unfortunately reinforces that higher for longer narrative," Selma Hepp, chief economist at Cotality, told National Mortgage News.

Noting that the initial reactions from the financial markets have been all over the place, she continued "it's not good for mortgage rates or the bond market, and so I think we're going to see continued volatility."

While what the Federal Open Market Committee does with the fed funds rate does not directly impact longer-term instruments like mortgages, it does influence investor sentiment. Those investors then express those in the market price for 10-year Treasuries.

As the market price for bonds declines, the yield, a benchmark used in pricing 30-year fixed rate mortgages, rises.

Why observers put an October rate hike on the table

While investor reactions have calmed since the initial frenzy, whether the FOMC acts in October or not, the CPI news is still not good for mortgage lenders.

The CPI reported headline inflation rising 3.7% in September. This was 0.1 percentage points higher than expectations, said Sam Williamson, senior economist at First American. It compares with a 3.4% increase in August.

He said the increase brings an FOMC October rate hike back into play. This is not good for potential homebuyers because it is likely to "keep mortgage rates elevated for longer as investors adjust to the prospect of more persistent inflation, pushing meaningful affordability relief further out," Williamson said in a commentary

Why inflation news matters for housing

"Elevated rates also reinforce the lock-in effect, limiting housing inventory and slowing home sales," he continued. "Rising incomes and cooling house prices are helping buyers gradually regain purchasing power, but high borrowing costs continue to erode some of those gains."

This news was somewhat in line with expectations Hepp said, while noting that policymakers keep a watchful eye on this data. Plus, the last FOMC meeting's notes gave some hints as to what was going on.

Still, "inflation is outpacing wage growth, meaning that real wages are declining," Hepp said. "That never bodes well."

At one point Wednesday morning CME FedWatch probabilities were slightly more than half for a 25 basis point hike, but those shifted by 10:30 Eastern time to 56% for staying the course. In either case, this was much lower than Tuesday's 77% for no action in October.

"Today's numbers show that inflation is clearly stubbornly sticking around," said LendingTree chief consumer finance analyst Matt Schulz. "That's not great news for potential homebuyers hoping for lower mortgage rates in the near future.

"It also makes it more likely that the Fed will move to raise rates again before the end of the year, maybe even as soon as this month, though that's far from guaranteed at this point."

An unchanged outlook

Most experts, including the Mortgage Bankers Association and the Wolters Kluwer Blue Chip Economic Indicators panel were leaning toward a December increase before the CPI release.

The MBA released its October forecast at its annual convention in Chicago on Sunday. The CPI news did not change its outlook. For the fourth quarter, the group's economists are still expecting rates to average 7.3%, and around 7% for all of 2027.

Wolters Kluwer released the BCEI on Oct. 9.  A special question asked if financial conditions had tightened recently. Just under 60% of the respondents chose "yes, but not enough to slow the economy or reduce inflation" as their answer.

"That view also was evident in the economic projections, as expected GDP growth showed no sign of faltering, and projected inflation remained above the Fed's target of 2% at the end of the forecast horizon," the survey report said.

At the time of the survey, just 11% of BCEI panelists expected the FOMC to act in October, with 84% believing it would wait until December. While none are expecting the next action in January, 5% said later than that meeting.

This is a shift from the September BCEI, when two-thirds expected the FOMC not to act until 2027.

The shift in the CME FedWatch predictions was also seen in the 10-year Treasury yield, which peaked at 5.33% but was down to 5.25% just before noon. Still this is 3 basis points higher on the day and within the range it has been trading at in recent weeks.

Before the CPI release, Hepp was also expecting the next time the FOMC would act would be in December. She is still leaning towards this view.

This could be a one-time shock because of rising oil and diesel prices, Hepp pointed out.

"What may be worrying is shelter remaining elevated," she said. "That's not unexpected either; mortgages are high and home prices are high."

At the same time, higher energy prices are spilling over into the broader picture, renewing inflation expectations.