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Mortgage rates gained room to fall again on Friday after a key inflation measure improved in August, with investors betting the Federal Reserve will continue aggressive rate cuts in November. My confidence in this has increased.
of personal consumption expenditure (PCE) Price Index, Federal Reserve Board preferred measures According to the inflation rate, prices of goods and services rose by 2.2% year-on-year in August. This is down from 2.5% in July and shows that inflation continues to inch closer to the Fed’s 2% target.
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10 year government bond yieldThe barometer for mortgage rates fell by as much as 5 basis points on Friday. Investors in the bond market are increasingly confident that Fed policymakers will do the same on Nov. 7, following last week’s dramatic 50 basis point cut in short-term interest rates. A basis point is one hundredth of a percentage point.
Fed policymakers have made clear they intend to continue lowering short-term interest rates this year and next, but uncertainty over the pace and timing of the cuts is sending mortgage rates up and down.
Many economists expected the Fed to begin its rate-cutting campaign last week with a more modest 25 basis point cut in the federal funds rate. But the “tepid inflation numbers” released Friday “underscore why the Fed was so confident” in initiating bolder action, said Diane Swonk, chief economist at KPMG US. said. breaking news.
of CME FedWatch ToolsThe agency, which tracks futures markets to calculate the likelihood of the Fed’s future policy actions, on Friday put the probability of another 50 basis point rate cut in November at 57%, up from 49% on Thursday.
Inflation is nearing the Fed’s 2% target
The annual inflation rate has fallen by a full 5 percentage points to 2.24% since reaching a post-pandemic peak of 7.25% in June 2022, according to Friday’s release of the PCE price index.
diane swonk
“The improvement in inflation is more widespread than we saw just a year ago, in part because discounts are putting downward pressure on the prices of many goods,” Swonk said. “Everything from consumer opposition to price increases to increased productivity growth to a strong dollar and overcapacity overseas continue to put pressure on prices.”
Core PCE, which excludes food and energy costs, peaked at 5.65% in February. Core PCE fell to a 2024 low of 2.63% in June, before gradually rising to 2.68% in July and August.
Forecasters at Pantheon Macroeconomics said they believe core PCE inflation will decline modestly to 2.5% in the final three months of 2024, following recent declines in energy prices and transportation costs. Ta.
Since hitting a 2024 high of 7.27% on April 25, bond market investors who fund most mortgages have been pricing in expectations that the Fed will cut interest rates this year and next. , mortgage interest rates are on the decline.
But once the central bank actually started cutting short-term rates last week, mortgage rates rebounded as investors digested the latest “dot plot” and Fed policymakers assumed a cautious pace for future rate cuts. I showed that I was doing it.
Mortgage interest rates during rebound
After hitting a new 2024 low of 6.03% on September 17th, the rate lock data tracked as follows: Optimal blue It shows that 30-year fixed rate conforming mortgage rates rose 10 basis points on Thursday to an average of 6.13%.
Optimal Blue data is delayed by one day, but rate data is tracked as follows: daily mortgage news Friday showed mortgage rates fell slightly. However, interest rates on 30-year fixed-rate loans fell just 1 basis point, which was less than the decline in 10-year Treasury yields.
To combat inflation, the Fed raised the federal funds rate 11 times from March 2022 to June 2023, targeting short-term interest rates of 5.25% to 5.5%, the highest level since 2001.
But in addition to controlling inflation, the Fed has a mission to use its monetary policy tools to help maintain full employment. Now that Fed policymakers are increasingly confident that they are controlling inflation, they have cut interest rates to prevent a sharp economic slowdown and job cuts.
The latest dot plot shows that policymakers are envisioning a combined 2 percentage point cut in the federal funds rate this year and next, with a 25 basis point cut in November and December and a 25 basis point cut in 2025. It has signaled several rate cuts totaling 1 percentage point.
But Pantheon’s forecasters believe that if job growth slows and the unemployment rate continues to rise, the Fed will be forced to act more quickly to avoid a recession. Pantheon projects the federal funds rate will be 2.75 percentage points below its recent high by next June.
Spring Sub-6 Mortgage Interest Rate Forecast
sauce: fannie mae and Mortgage Bankers Association Forecast, September 2024.
Economists at Fannie Mae and the Mortgage Bankers Association expect interest rates on 30-year fixed-rate loans to fall below 6% in the second quarter of 2025, in time for the spring home-buying season.
MBA economists forecast on Sept. 23 that they expect interest rates on 30-year fixed-rate mortgages to average 6.2% in the last three months of 2024, before falling to 5.8% in the fourth quarter of 2025. said.
In a Sept. 10 forecast, Fannie Mae economists expected 30-year mortgage rates to average 6.1% in the third quarter of 2024 and 5.7% in the fourth quarter of 2025.
Separate data released on Thursday showed the economy grew at an annualized rate of 3% in the second quarter of 2024, putting upward pressure on long-term interest rates.
However, the revised estimates on Thursday gross domestic product (GDP) also raised hopes that the Fed’s easing will help avoid a recession and achieve a “soft landing” for the economy.
“Consumer spending picks up right after the discount, which is the very definition of a soft landing,” Swonk said. “The muted inflation numbers highlight why the Fed was confident that inflation was close to its target when it cut interest rates by 0.5% in September. At least another 0.5% cut is expected by the end of the year. If September’s employment report is unusually weak, the scale could tip toward large-scale cuts.
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