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Mortgage rates were trending higher on Friday after the latest data on the Federal Reserve’s preferred inflation gauge showed the economy continued to cool in July, though at a gradual pace that suggests Fed policymakers will likely be content with only modest cuts to rates in September.
According to the Commerce Department’s Bureau of Economic Analysis, the personal consumption expenditures (PCE) price index showed that prices of goods and services rose 2.5% year-on-year in July, just 0.5% above the Fed’s 2% target. Reported.
That’s not better than June, but inflation has slowed sharply in the second half of 2023, making the year-over-year measure harder to move, said Diane Swonk, chief U.S. economist at KPMG. breaking news.
Diane Swonk
“Federal Reserve Chairman Jay Powell has warned that so-called ‘base effects’ will drive up year-over-year inflation through the end of the year,” Swonk said. “Because base effects disappear from the data in early 2025, inflation doesn’t need to improve significantly on a monthly basis from here for the Fed to get significantly closer to its 2% target in early 2025.”
Inflation is approaching the Fed’s 2% target
Housing and utilities were the largest drivers of rising service costs, while automobiles, auto parts, and food and beverages were the largest drivers of rising goods costs.
Core PCE, which excludes food and energy costs and can be a more reliable gauge of underlying inflation trends, rose 2.62% year-on-year, up from a revised 2.58% in June.
The 0.16% increase in core PCE from June to July The Wall Street JournalIan Shepherdson, chief economist at Pantheon Macroeconomics, said in a client note:
Ian Shepherdson
“Growth in consumer spending has significantly outpaced growth in real income for some time now, but this has only been possible because personal savings rates have fallen to very low levels,” Shepherdson said.
Shepherdson said the savings rate was “unsustainably low” at 2.9% in July, compared with just over 6% before the pandemic.
Pantheon economists expect the continued softening of the labor market to lead to increased precautionary saving and a significant slowdown in consumption growth “over the coming quarters.”
Two weak jobs reports released in early August raised warning signs of a recession. SamrullNamed after an economist Claudia ThurmFederal Reserve policymakers are trying to curb inflation without causing mass layoffs as part of their “dual mandate.”
Federal Reserve Chairman Jerome Powell indicated last week that the central bank intends to cut interest rates at its next meeting on Sept. 18, but said the timing and pace of cuts would “depend on upcoming data, evolving expectations, and the balance of risks.”
Powell’s Jackson Hole Speech
“Our goal is to restore price stability while maintaining a strong labor market and avoid the sharp increases in unemployment that have characterized previous disinflationary periods when inflation expectations were less anchored,” Powell told bankers attending the Jackson Hole Economic Symposium on Aug. 23.
The futures market is CME FedWatch The tool showed that while investors remain confident the Fed will cut rates, the odds that policymakers will start with a larger cut of 50 basis points fell to 30% on Friday from 36% a week ago.
Shepherdson said Pantheon forecasters are sticking to their view that the Fed will cut the federal funds rate — the interest rate banks charge each other for overnight loans — by 25 basis points in September, followed by bigger cuts of 50 basis points in November and December.
A basis point is one-hundredth of a percentage point, so Pantheon projects the Fed will cut short-term interest rates by 1.25 percentage points by the end of the year and another 1.5 percentage points next year.
Federal funds rate hits 23-year high
Federal Reserve policymakers approved 11 hikes in the federal funds rate between March 2022 and June 2023, raising the target for short-term interest rates to 5.25% to 5.5%, the highest level since 2001.
Swonk noted the potential for job cuts as prices of items such as clothing and big-ticket durable goods fell for a fourth consecutive month in July, and said KPMG’s forecasting team still expects a 50 basis point rate cut in September.
“Consumers continued to spend on discounts in July, drawing down their savings to do so,” Swonk said. “The Fed welcomes growth after discounts, but wants to cut rates before discounts trigger a surge in layoffs. This shift has led Fed Chairman Jay Powell to shift the risk the Fed is hedging from inflation to a weakening labor market.”
While the Federal Reserve does not directly control mortgage interest rates, bond market investors, who finance most mortgages, are already accepting lower yields in anticipation of future rate cuts.
Falling mortgage rates
Since hitting a record high of 7.27% for 2024 on April 25th. Optimal Blue Rates on 30-year fixed-rate mortgages fell nearly a percentage point to hit 6.30 percent on Wednesday, the lowest this year, according to the data.
Thursday, relatively Employment report is good For the week ending Aug. 24, initial unemployment claims fell by 2,000 to 231,000.
Interest rates rose again on Friday following the release of the PCE price index, which showed inflation was less subdued than expected.
yield 10-Year Government Bond The benchmark mortgage rate rose 4 basis points. Mortgage News Daily Lender Research On Friday, interest rates on 30-year fixed-rate mortgages were shown to have increased by 2 basis points.
One side effect of the recent decline in mortgage interest rates has been a narrowing of the “spread” between mortgage rates and the 10-year Treasury yield.
Before the pandemic,30-10 spread” grew to 3 percentage points last year from just 2 percentage points the previous year, alarming housing and lending trade groups including the National Association of Realtors and the Mortgage Bankers Association.
As interest rates rose, investors in mortgage-backed securities (MBS) demanded higher yields to compensate for “prepayment risk” — the possibility that homeowners would refinance if interest rates fell.
Mortgage rates are currently 1.5 percentage points lower than the post-pandemic high of 7.83% recorded in October 2023, reducing the risk of prepayment on currently taken out loans.
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