By Holden Lewis | NerdWallet.com

Mortgage rates might rise in September, for the fifth month in a row, because of uncertainty about what the Federal Reserve will do in the coming months.

The Fed is cultivating ambiguity about its course of action — a deliberate policy choice that shores up a floor under mortgage rates. Someday, after the central bank signals its intentions clearly, mortgage rates will drop. But that almost certainly won’t happen in September.

The Fed has been raising short-term interest rates since early 2022 to get inflation under control, and mortgage rates have followed. Before the Fed began its rate-raising campaign, the 30-year mortgage was a little over 3%; this August, it averaged 7.18%.

The higher rates have thwacked home buyers. In July 2019, when mortgages averaged 4.06%, people bought 540,000 existing homes. This July, people bought 372,000 existing homes.

The central bank’s monetary policy committee will meet Sept. 19 and 20 to either raise the short-term federal funds rate or keep it unchanged. As of Aug. 30, the CME FedWatch tool points to an almost 90% chance that the Fed will keep rates unchanged.

Fed’s eyes are set on inflation

Every August, the chair of the Fed speaks at an economic policy forum in Jackson Hole, Wyoming. Fed Chair Jerome Powell’s 2023 speech began with a stark statement of purpose. “It is the Fed’s job to bring inflation down to our 2% goal, and we will do so,” he declared.

Then he shrouded the Fed’s next move in doubt. He noted that the inflation rate has gradually fallen since peaking in February 2022, with welcome declines this June and July, “but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.”

Powell didn’t say how many months of declining inflation it would take before the Fed will be confident that it has succeeded. But he added “there is substantial further ground to cover to get back to price stability,” so it’s a safe bet that a third month of receding inflation won’t be enough, either.

In short, Powell vowed not to declare victory prematurely. Another Fed rate increase is possible — and a rate cut might not happen for a long time.

What other forecasters predict

Fannie Mae, the Mortgage Bankers Association and the National Association of Realtors expect mortgage rates to peak in the third quarter (July through September) and to fall in the final three months of the year. Fannie Mae said it expects that further Fed rate increases “are off the table for now following the latest hike in July” in support of its prediction of lower mortgage rates in the fourth quarter.

Mark Fleming, chief economist for First American Financial Corp., predicts a higher floor than the above three forecasters, because economic and geopolitical uncertainty will keep rates higher. “A likely scenario is that mortgage rates continue to hover in the 6.5-to-7.5 percent range for the remainder of the year, which means affordability will remain a challenge for many home buyers,” he wrote in a blog post.

What happened to mortgage rates in August

At the beginning of August, I predicted that mortgage rates would rise in response to persistent inflation and economic growth. Indeed, rates followed that script. The average rate on the 30-year mortgage was more than a quarter of a percentage point higher in August than in July.

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