The growing national deficit could soon lead to a dramatic spike in mortgage rates unless federal revenues catch up with spending, former Treasury Secretary Larry Summers warned during a speech on Monday.
Rates, which recently fell to their lowest level in months in anticipation of the Federal Reserve’s decision to cut its key rate in September, “are considerably more likely to rise than fall from here,” Summers said while speaking at this year’s Mortgage Bankers Association (MBA) annual conference in Las Vegas.
‘Unsustainable’ Scenario ‘Most Likely’
As of October 16, according to Freddie Mac, the average 30-year fixed-rate mortgage was 6.27 percent. The rate was down 0.17 percentage points from a year earlier and down from its October 25, 2023, peak of 7.79 percent. Still, it was more than double the pandemic lows of 2 to 3 percent.
While experts at Fannie Mae expect mortgage rates to end 2025 and 2026 at 6.4 percent and 5.9 percent, respectively—a drop that would be welcome to struggling homebuyers across the country—MBA chief economist Mike Fratantoni warned on Sunday that growing budget deficits and potentially higher inflation in the coming months would prevent them from falling further.
“As we move over the next couple of years, we think it’s more likely that long [term] rates are going to go up rather than down, given the fiscal pressures on the economy,” he said while speaking in Las Vegas.
Summers, who served as Treasury secretary under President Bill Clinton between 1999 and 2001 and as director of the White House’s National Economic Council for President Barack Obama between 2009 and 2010, laid out two scenarios ahead for mortgage rates.
“One scenario is that growth continues more or less as it has for the last 20 years. If so, the current federal fiscal trajectory is unsustainable,” he said. If this scenario comes to pass, the bond market will “hit a wall,” Summers added, with the 10-year Treasury yield surging 75 basis points in a month and mortgage rates jumping by a full percentage point within the same period.
Summers described this nightmarish turn of events as “the most likely consequence of the path we’re on.”
However, in the second scenario, artificial intelligence could save the day, according to the former Treasury secretary.
The AI Exception
For the fiscal year that ended in September, the federal deficit totaled $1.78 trillion, down $41 billion from $1.82 trillion for the same period last year.
On Monday, Summers said AI had the potential to stop the country from continuing on this trajectory, supercharging growth and easing concerns over the federal deficit.
“If we were to get a major acceleration in productivity growth, then a lot of this fiscal bad news would suddenly look more controllable and more sustainable,” he said. “So I think we’re somewhat hostages to fortune on what the rate of growth is.”
Gary Cohn, the IBM vice chairman who served as director of the National Economic Council during President Donald Trump’s first term, also attended the MBA conference. He expressed a similar confidence, calling himself “bullish” about AI.
“I also remind people here that AI is the front door to where we’re going, and where we’re going is quantum [computing],” he said. “When you grow productivity, you grow the size of the economy. As you grow the size of the economy, even if you keep the tax rate the same, you collect more taxes.”
The U.S. is a leading investor in AI, especially when it comes to the private sector. In 2024, private AI investment in the U.S. reached $109.2 billion, almost 12 times higher than China’s private investment, according to Stanford University data. While it is still early in the journey toward the AI revolution, according to J.P. Morgan, AI-related capital expenditures contributed to 1.1 percent of gross domestic product growth in the U.S. in the first half of 2025.
