The Fed Has Stayed on Hold. Why Have Mortgage Rates Risen 78 Basis Points?
Policy Stays on Hold, but Mortgage Rates Keep Rising
The Fed was due to announce its interest-rate decision at 2:00 a.m. Beijing time on September 17. It had left rates unchanged at the previous five meetings. Yet US 30-year mortgage rates had risen 78 basis points from their February low of 5.98% to 6.76% on September 10.
The central explanation is that the Fed controls the short-term rate on overnight borrowing between banks, whereas a 30-year mortgage is very long-term borrowing. The two are not directly priced by the same factor.
The Fed can influence long-term rates only indirectly, through market expectations. It cannot directly fix the cost of long-term borrowing.
Two Forces Drive Long-Term Rates
Long-term Treasury yields have two components: the market’s expectations for future short-term rates, and the additional compensation investors demand for holding long-term bonds.
At the shorter end, the two-year Treasury yield rose from 3.38% on February 27 to 4.63% on September 11, an increase of 125 basis points. This can be viewed approximately as a repricing of the expected policy path over the next two years. The additional compensation on ten-year bonds estimated by a Fed model rose from 0.4627% on February 27 to 0.8892% on September 4, an increase of about 43 basis points. That figure is a model estimate, rather than something directly determined by the Fed’s current decision.
Both components were rising. The ten-year Treasury yield climbed from 3.97% on February 27 to 4.96% on September 11, a gain of 99 basis points. Long-term Treasury yields serve as a reference for US mortgage pricing. The two moved in the same direction but by different amounts, with mortgage rates rising less than the ten-year yield.
CPI Shows What the Market Is Repricing
August CPI data were released on September 11. The market reaction that day was revealing: the two-year Treasury yield rose 7 basis points, the ten-year yield rose just 1 basis point and the thirty-year yield fell slightly, by 2 basis points.
Looking at that day alone, the clear movement at the short end and relative stability at the long end suggest that the market was adjusting the near-term monetary policy path, rather than distant long-term rates.
Two Signals to Watch After the Decision
First, focus on two aspects of the decision itself:
- The extent of disagreement in the vote. The previous vote was 9–3, with three members supporting a 25-basis-point increase.
- The dot plot, which records participants’ anonymous interest-rate expectations. It is not a voting result, but a view of the expected policy path.
Second, watch the divergence between two-year and ten-year Treasury yields. If only the short end rises, the market is still revising the policy path, with limited implications for mortgages. If the long end rises as well, the market is changing the price it demands to lend money for ten years—and that is the end mortgages follow.
Mortgage data also arrive with a lag. The September 17 release would reflect only half a day after the decision. The September 24 release would be needed to cover the post-decision changes in full. Mortgage quotes are usually determined less by a single rate decision than by the sustained direction of the long-term bond yield curve afterwards.