The verdict is in: the old way of doing business is over. Join us at Inman Connect New York January 23-25 as we work together to address today's market challenges and prepare for tomorrow's opportunities. Challenge the market and bet big on your future.
A surprise rise in a key inflation indicator means the 2024 rate cuts that Federal Reserve policymakers telegraphed in December will come later rather than sooner, which could prevent further declines in mortgage rates until after the spring home-buying season.
The Bureau of Labor Statistics reported Thursday that rising rents and energy costs helped the consumer price index (CPI) rise 3.4 percent year-over-year in December, compared with annual growth of 3.1 percent in November.
It was the first time since September that the key inflation index moved in the wrong direction – away from the Fed's 2 percent target. The core CPI, which excludes volatile food and energy prices, rose 3.9 percent year-on-year in December, an improvement from annual growth of 4.0 percent in November.
Diane Swonk
“Today’s data confirms our view that the Fed will cut interest rates significantly less aggressively than many in financial markets are hoping,” said KPMG chief economist Diane Swonk in a thread on the social media platform X. “They are aiming for a gentle one Landing on.” That’s a difficult needle to thread. Soft landings are not the same as no-landing scenarios.”
Swonk said KPMG is sticking with the firm's previous forecast that the Fed will approve four rate cuts this year and won't begin cutting rates until June.
Economists polled by Reuters ahead of the release of the latest inflation data also expected 10-year Treasury yields to remain near current levels through June, meaning mortgage rates were unlikely to change much during the spring home-buying season .
Consumer Price Index
The CPI reached 9 percent in June 2022 after pandemic-related supply chain issues and Fed easing measures pushed up prices for food, gasoline and other goods. To slow the economy, Fed policymakers raised interest rates 11 times between March 2022 and July 2023, pushing the federal funds rate to a 22-year high of 5.25 to 5.50 percent.
The rate hikes — along with “quantitative tightening,” in which the Fed is expected to withdraw $1 trillion in support from bond markets this year — helped push the consumer price index down to 3 percent in June. But inflation proved stubborn and further increases were not possible.
However, futures markets tracked by the CME FedWatch tool show that as of Thursday afternoon, investors were still pricing in a 69 percent chance that the Fed will begin cutting rates in March, up from 43 percent on Dec. 11. The Fed will cut rates six or more in 2024 make more interest rate cuts, twice as many as Fed policymakers indicated in their latest summary of economic forecasts.
That's the view of Pantheon Macroeconomics, which forecasts that 10-year Treasury yields, a barometer for mortgage rates, will fall from 4 percent to 3.5 percent by the end of June and to 3.25 percent by the end of the year.
Ian Shepherdson
“These numbers do not change the overall picture,” Pantheon chief economist Ian Shepherdson said in a note to clients on Thursday. “Prices for core goods are stagnating or falling, rent increases are slowing but remain high, and inflation in core services is still stubborn. However, keep in mind that the Fed cares more about core PCE than core CPI and that the two numbers often differ from month to month.”
The Fed's other inflation indicator: core PCE
The Bureau of Economic Analysis reported Dec. 22 that the core personal consumption expenditures (PCE) price index, which excludes food and energy prices, fell to 3.2 percent in November from 3.4 percent in October. With the exception of January, core PCE has trended in the right direction every month over the past year.
“Wait for core PCE before jumping to judgment on inflation,” Shepherdson said of December numbers due to be released on Jan. 26.
While economists at Fannie Mae and the Mortgage Bankers Association continue to expect the U.S. to experience a mild recession in 2024, hopes are growing that the Fed can pull off a soft landing. Even a soft landing will cause pain, Swonk warned.
“A soft landing will put pressure on profit margins, particularly for medium and smaller companies, which are more affected by interest rate hikes and debt repricing,” Swonk said. “Higher interest rates and a return to price increases lead to cost reductions and a reduction in hiring plans.”
The silver lining is that the Fed appears to be as concerned about the risks of raising interest rates as it is about inflation.
At the Fed's last meeting, “Powell made clear that given the progress in cooling inflation, he was ready to avert a full recession in 2024,” Swonk said. “This is a big change from where we were a year ago.”
Get Inman's Mortgage Brief newsletter straight to your inbox. Every Wednesday there is a weekly round-up of the most important news from the world of mortgages and deals. Click here to login.
Email Matt Carter
Comments are closed.