Fed Rate Hike Could Actually Lower Mortgage Costs in Long Run

Homebuyers tend to view the Federal Reserve as a surgeon who should keep interest rates low, hoping for cheaper money and smaller monthly payments. However, a recent trend suggests that this might be a self-defeating instinct in the long run.

The current federal funds rate is between 3.50 and 3.75 percent, while the 10-year Treasury yield has reached its highest level since 2007 at 5.041 percent. The average top-tier 30-year loan has risen to 7.17 percent, with Freddie Mac's weekly survey putting the national average at 6.76 percent for the week ending September 10.

The Fed's policy rate matters primarily through what it signals about future short rates. However, the rise in mortgage costs this year cannot be inferred from where the funds rate sits today. The distance between the overnight rate and long-term yields is significant, with the overnight rate in the threes, the long rate in the fives, and the mortgage rate in the sevens.

Some analysts argue that a quarter-point rise from Kevin Warsh's Fed would help restore inflation-fighting credibility and ease upward pressure on long-term yields. This thinking inverts the usual consumer logic, suggesting that a hike is not the event, but rather the hold, which risks pushing long yields higher.