The speed with which mortgage rates have risen in recent days has been astounding, especially given that rates were already at their highest levels in more than a decade before it began. By yesterday afternoon, the average lender had risen to 6.28 percent for a top tier 30yr fixed quotation, up from 5.55 percent on Thursday.

Last Friday’s Consumer Price Index (CPI), a key inflation data that showed prices growing faster than expected, kicked off the drama. Inflation is the Fed’s main concern right now, and it’s the main basis for their increasingly aggressive efforts to raise rates in 2022.

However, the CPI alone would not have been worth the spectacle we watched. The recent excitement was exacerbated by the fact that the financial market was aware of a Fed statement on Wednesday as well as the fact that the Fed was in its regularly scheduled “blackout period.” The Fed refrains from making public comments on monetary policy during the blackout period. To put it another way, markets were flying blind as to how the Fed would react to the CPI report, and speculation was rife.

The market’s crazy imagination was actually rather accurate when we finally heard from the Fed today, according to the early reaction. Fed Funds Futures forecast that the Fed will raise its policy rate by 75 basis points (0.75 percent) (tradeable contracts that allow markets to bet on the level of the Fed Funds Rate). Not only that, but the early reaction in bonds (the financial instruments that govern interest rate movement and where we’d expect to see the most obvious reaction) was rather sideways.
How is that possible?! Wouldn’t mortgage rates rise by 75 basis points if the Fed raised rates by 75 basis points?

For those of us in the industry, this is a common cause of aggravation. The quick answer is that mortgage rates are not determined by the Fed Funds rate. Big changes in Fed Funds Rate expectations, at best, tend to transfer effectively into mortgage rate momentum. The simple truth is that by the time the Fed actually raises or lowers interest rates, the market has already priced in whatever the Fed is likely to do.

Returning to today’s strong rate development… Bonds didn’t have much of a sense of security until Fed Chair Powell made one critical remark. What exactly did Powell have to say? It was actually fairly straightforward. Powell believes that 75-basis-point rate rises will be rare, and that the next move will be in the other direction.

This was worth a breather from the recent tension for a market that was “confident” we’d see two straight 75bp raises. Powell also showed markets that he’s serious about correcting the Fed’s mistakes on the inflation front by increasing 75 basis points at this meeting and leaving it on the table for the next meeting (the “wrongs” being that the Fed let policy run too hot for too long and underappreciated the tenacity of the current inflation regime).

The bond market celebrated, with mortgage-related bonds improving enough for the typical lender to lower rates by at least a quarter of a percent. Depending on the beginning position, some lenders reduced rates even more.

That is to say, the rate reduction is contingent on the actual amount of yesterday’s rate quote. If it was 6.75 percent, some lenders went all the way to 6.25 percent (one of the largest single-day decreases in history), but if it was 6.25, the same lender might just have lost a quarter of a point (still phenomenal, but not 2x phenomenal).

The mortgage market is currently a highly stratified and extremely volatile environment, as it has been and continues to be. There are no problems with credit availability (money is available to lend, and there are no “signs of stress,” as some irresponsibly-worded headlines recently claimed), but it’s not all sunshine and lollipops when it comes to buying and selling.