Just two weeks ago, mortgage rates were headed to 6 percent. The consensus among investors and lenders was that mortgage rates would stay at their highest levels in more than a decade.

Instead, rates have taken a turn. The average rate on a 30-year loan plunged 30 basis points in the past week, according to Bankrate’s weekly survey of lenders.

Why the about-face? Blame the ongoing battle between inflation and an overheating economy on one hand, and a Fed-fueled recession on the other.

“Concerns about recession have gotten the upper hand, and that has stoked a belief that the Fed will change course – such as stopping rate hikes – sooner than previously thought,” says Greg McBride, Bankrate’s chief financial analyst. “The economy is slowing, but the inflation issue hasn’t been put to bed by any means, so a bad consumer price index reading next week could quickly erase the decline we’ve seen over the past few weeks.”

The Fed is moving aggressively

Inflation is running hot. Spurred on by the pandemic stimulus and exacerbated by supply-chain chokepoints, consumer prices rose at an annual pace of 8.6 percent as of May, according to the U.S. Labor Department. That’s far higher than the Federal Reserve’s target rate of 2 percent.

Seeking to rein in inflation, the central bank in mid-June raised rates three-quarters of a percentage point, its largest hike since 1994. And mortgage rates responded – in the week after the Fed meeting, the average rate on a 30-year loan in Bankrate’s survey climbed to 5.91 percent. That was the highest reading since June 2009.

However, the Fed doesn’t directly set mortgage rates. And with many expecting another nasty inflation report for June, the central bank could raise rates another three-quarters of a percentage point at its meeting in late July. That has many investors worrying that, as the Fed tries to tame inflation, it will send the economy into recession.

Counterintuitively, a rate hike by the Fed could lead to lower mortgage rates, some say.