Dallas Fed, Report: Interest rate volatility contributed to higher mortgage rates in 2022

“The Federal Reserve aggressively tightened monetary policy in 2022, responding to high and persistent inflation. The resulting borrowing cost increase for households and firms was generally anticipated. However, fixed-rate mortgage interest rates were especially sensitive to the policy regime change.”

“We find that interest rate volatility and the unique nature of mortgage instruments were important contributors to last year’s outsized mortgage rate moves.”

“While the increase in mortgage rates during 2022 was primarily driven by the rise in risk-free Treasury rates, it was amplified by increases in the cost of the mortgage prepayment option, which reflected broader uncertainty about the future path of interest rates.”