The Federal Reserve Chairman Jerome Powell said during a Wednesday afternoon speech at the Brookings institute that monetary policy affects the economy and inflation with uncertain lags, and the full effects of the ongoing tightening have yet to be felt. 

The mortgage market, however, tells a different story. 

So far, the market has quickly reflected the impact of the Fed’s moves. To illustrate, mortgage rates are on a downward trend amid signs that inflation has started to cool down. In turn, the Fed may reduce the pace of the federal funds rate increases. 

The tightening monetary policy has resulted in a cumulative 375 bps hike: 25 bps in March, 50 bps in May, and four subsequent 75 bps increases in June, July, September, and November. Fed officials will meet on December 13 and 14, and the bets are on a 50 bps hike. 

“It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said at the Hutchins Center on Fiscal and Monetary Policy in the Brookings Institution. 

Powell’s statement alone was enough to bring the Treasury yields down. The 10-year note went from 3.75% on Tuesday to 3.68% on Wednesday. It then dropped to 3.59% on Thursday morning. 

“Bond yields fell when Powell talked about the fact that the Fed officials don’t want to raise rates too much,” said Logan Mohtashami, lead analyst at HousingWire. “The bond market found some buyers, and mortgage rates should be lower Thursday.” 

“The last time we saw a big drop in yields was after the CPI report came in lighter than expected in November, meaning inflation targets were missed. It dropped mortgage rates too,” he added.

The mortgage market reaction

Mortgage rates tend to align with the 10-year U.S. Treasury yield. This means that when bond yields fall, mortgage rates will typically go down, a relationship that has existed since 1971, according to Mohtashami. 

As expected, the 30-year fixed-rate mortgage decreased to 6.49% this week, down nine basis points compared to the previous week, according to the latest Freddie Mac survey. The same rates averaged 3.11% one year ago. 

“Mortgage rates continued to drop this week as optimism grows around the prospect that the Federal Reserve will slow its pace of rate hikes,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “Even as rates decrease and house prices soften, economic uncertainty continues to limit homebuyer demand as we enter the last month of the year.”

Mortgage rates differed slightly on other platforms. Black Knight‘s Optimal Blue OBMMI pricing engine, available on HousingWire’s Mortgage Rates Center, measured the 30-year conforming rate at 6.54% on Wednesday, down from 6.56% the previous week. 

The current measure at Mortgage News Daily shows the 30-year fixed rate at 6.29% for conforming loans as of Thursday noon, a 34 bps decline compared to one day prior. 

“The Fed is indicating that the aggressive rate hikes this year have been enough to start slowing inflation. Markets also welcomed today’s PCE price index—the Fed’s preferred inflation metric—which showed that growth is slowing,” George Ratiu, Realtor.com’s manager of economic research, said in a statement. 

Mohtashami said rates should be even lower. 

“If the mortgage back securities market was working properly, rates should be under 6% today,” he said. “But the mortgage back securities market isn’t running great still because the biggest buyer of the market, the Fed, over the years has left and has no desire to get into this marketplace for now – it’s not worth the risk.” 

The Mortgage Bankers Association (MBA) also expects rates to continue the downward trend, according to the trade group’s president and CEO, Bob Broeksmit. 

“The 30-year fixed mortgage rate has fallen nearly 60 basis points over the past four weeks, which has drawn some prospective buyers back to the market,” Broeksmit said in a statement. “With signs of economic slowing both in the U.S. and globally, mortgage rates will remain volatile but are likely to continue to trend downward.”

The latest MBA forecast indicated mortgage rates will finish the year at 6.7%.