Mortgage rates experienced a slight decrease this week, but it was not enough to spur most buyers into action. The average rate for a 30-year fixed-rate mortgage dropped five basis points to 6.79% for the week ending Feb. 20, according to data from Zillow provided to BW. A basis point represents one one-hundredth of a percentage point.
While this is the lowest average rate seen so far this year, the peak in mid-January was only slightly higher by about a quarter of a percentage point. It seems that we are in a relatively stable period for mortgage rates, as over the past year, the average rate for a 30-year fixed-rate mortgage has mostly fluctuated between 6.5% and 7%.
The likelihood of a significant drop in mortgage interest rates is uncertain. By examining the actions — or lack thereof — of the Federal Reserve, we may gain some insight.
The Federal Reserve plays a crucial role in influencing interest rates. Last fall, the Fed began reducing the federal funds rate, which is a rate it directly controls. Changes to the funds rate have a ripple effect on other interest rates, including mortgage rates.
One of the Federal Reserve’s primary objectives is to maintain a 2% inflation rate. When inflation rises rapidly, the Fed may increase interest rates to curb borrowing. Conversely, a slow inflation rate could prompt the Fed to lower interest rates to encourage spending. At its most recent meeting in January, the Fed paused its rate cut campaign that began in September.
Minutes from the January meeting indicated that Fed governors are divided on the inflation outlook. While some believe that inflation is under control, others are concerned that the new administration’s policies on trade and immigration could lead to inflation.
Recent data releases, such as the Consumer Price Index, have shown an uptick in inflation, making the possibility of a rate cut at the next Federal Reserve meeting unlikely.
Another significant point discussed in the Fed minutes pertains to the Fed’s bond-buying activities, which also influence interest rates. During the pandemic, the Fed purchased trillions of dollars in Treasury bonds and mortgage-backed securities to support the economy. As the economy recovered, the Fed shifted away from these purchases, leading to an increase in mortgage rates.
The idea of slowing or halting the runoff of the Fed’s balance sheet, which was previously slowed in May 2024 and is set to conclude this summer, could potentially result in lower mortgage rates if the Fed decides to retain its remaining MBS.
Overall, the future trajectory of mortgage interest rates remains uncertain and is closely tied to the Federal Reserve’s actions and economic indicators.