What does the price of an air-conditioner at Walmart have to do with the housing market?
The people who set mortgage rates are investors in mortgage-backed securities, or MBS, and they decide what coupon rate they will accept based largely on their expectations for inflation. MBS are bonds, and inflation eats away at bond returns.
So, if investors expect inflation to rise they will demand higher coupon rates, which translate into higher mortgage rates. The Federal Reserve doesn’t have an official role in setting home-loan rates, but MBS investors look to the Fed for guidance on its expectations for inflation.
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