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The economic outlook is hazy any month of the year, but June’s uncertainty is murkier than usual. The unpredictability is driven by two unknowns: the fate of the federal government’s debt ceiling and what the Federal Reserve will do at its June 13-14 monetary policy meeting.

Mortgage rates could rise through the first half of June, then level off or fall in the second half after the market digests the results of the mid-month Fed meeting. This forecast assumes that the debt ceiling issue will have been resolved before a government default. A default would push mortgage rates higher.

Sometime in the first two weeks of June, the federal government could run out of cash to pay all its bills, according to the Bipartisan Policy Center, unless policymakers successfully address the debt limit. But the think tank adds a note of complication: It says the Treasury might be able to avoid running out of money until July or even early August if enough tax receipts come on June 15 and it delays some pension contributions.

Uncertainty over the debt limit — including how long the global markets will have to hold their breath waiting for a resolution — does nothing to relieve mortgage rates and could push rates higher until the situation is resolved.

If policymakers don’t act in time and the federal government can’t pay all its bills, “a default on our debt would produce an economic and financial catastrophe,” Treasury Secretary Janet Yellen said in a February speech before the National Association of Counties. Interest rates for all types of loans would be expected to rise, and some predict mortgage rates would spike.

The Federal Reserve‘s next step adds yet another element of unpredictability. The central bank’s monetary policy committee is scheduled to meet on June 13 and 14. At the start of the Memorial Day weekend, the futures market was signaling a roughly 3 in 5 chance that the Fed would raise short-term interest rates by a quarter of a percentage point.

In the run-up to the meeting, mortgage rates might rise as investors hedge the possibility of a Fed rate increase. But if the central bank keeps short-term interest rates unchanged, we could see mortgage rates settle lower, in the financial markets’ version of a sigh of relief.

Fannie Mae’s economic and housing outlook for May predicted “a modest recession beginning in the second half of this year,” brought on by higher interest rates engineered by the Fed. However, it expects mortgage rates to start dropping in the second half of the year.

Freddie Mac isn’t predicting a recession but forecasts slower economic growth and higher unemployment. “In this scenario, long-term interest rates move largely sideways, staying in a range similar to where rates are today, perhaps moving up or down by around half a percentage point,” it said in its May economic, housing and mortgage market outlook. By “long-term interest rates,” Freddie is mainly talking about mortgages.

The Mortgage Bankers Association and the National Association of Realtors join Fannie in predicting a decline in mortgage rates starting in the second half of 2023 and continuing into 2024.

At the end of April, we predicted mortgage rates had “room to fall in May as the end draws near for this cycle of Federal Reserve rate increases.”