Why aren’t mortgage rates lower?

Why aren’t mortgage rates dropping as some people expected with oil prices lower? The 10-year yield this morning is trading at 4.51% and mortgage rates are still close to yearly highs, while oil prices are up this morning — but at $71, not over $100.

Well, the Federal Reserve hawks are running the show and they have been vocal about it. Three Federal Reserve members have come out with hawkish outlooks recently, all after oil prices have fallen sharply. I understand that people were told that as soon as oil prices fell, rates would fall with them, but right now we have had such a shift in Fed policy that the old playbook doesn’t work right now until we see some changes.

Let’s take a look at the recent statements, as one more Fed hawk has chimed in.

Statements from Fed hawks:

Minneapolis Fed President Neil Kashkari at the Aspen Ideas Festival on June 26:

• “I have penciled in one rate hike in 2026.”

Cleveland Fed President Beth Hammack on CNBC June 30:

• “If consumer data holds up, Fed policy may not be restrictive enough.”
• “Inflation is still too high, Fed may need to consider rate hikes.”
• “Job market is right around full employment, growth looks good.”

Yesterday, Fed Governor Christoper Waller threw his hat into the ring:

• “So I was willing to tolerate a longer movement back toward 2% target based on the labor market. But … those risks have completely flipped around now. Labor market seems to be stabilizing in the U.S., inflation’s been taking off. So then that changes how you might want to think about policy.”

Waller was the main ringleader of the doves last year as he was pushing for more rate cuts because the labor market was getting softer than the Fed should be comfortable with, but even he is hawkish now.

All of these Fed members could have said something different now that oil prices have fallen, but they haven’t, on purpose. This is their version of forward guidance to show everyone that inflation above 2% is a concern as long as the labor market is intact. I mean, last year was the lowest job growth in the 21st century and they were never at a neutral policy rate around 3%.

Conclusion

I know many consumers — along with their real estate agents and mortgage lenders — are frustrated, as they were told that falling oil prices would immediately mean mortgage rates would fall. Rates have fallen from this year’s peak, but we simply aren’t back to pre-conflict-level mortgage rates, and Fed policy has shifted.

Fed members need to sound more dovish, or economic data needs to worsen to see rates drop from here. Bond yields ticked up today as the weekly Redbook sales index, which has a good track record of correlating with retail sales data, showed 11.5% year-over-year growth. These kinds of data lines make certain Fed members less dovish with inflation above target.

The next Fed meeting is now going to be very critical because the Fed hawks will have to justify and explain their outlook now that some of their main concerns, rising oil prices and war, are off the table.