John's Finance Corner: The Fed's Inflation Measures and What It Means for Mortgage Rates
I wanted to share some insights on the Fed’s favorite measure of inflation and how it’s impacting mortgage rates. Last week, we received the latest readings from the Personal Consumption Expenditure (PCE) inflation report for December, and it met expectations. Here’s a breakdown of what happened and what it could mean for you.
PCE Inflation Report: The Fed aims to get the Core reading of the PCE inflation report to settle at 2%. In December, the headline figure rose by 0.3% from November, with the year-over-year reading climbing from 2.4% to 2.6%. The Core reading, which excludes food and energy prices, rose by 0.2% for the month and remained at 2.8% year-over-year—one of the lowest levels in the past three years. Interestingly, 18% of the Core numbers are composed of shelter costs, which have a reporting lag of about 12-13 months. Due to this lag, the accuracy of the report is often criticized. As the PCE report begins to reflect more realistic shelter costs, we might see the Core reading head closer to the Fed’s 2% goal. We expect to see even stronger improvements in the data by the end of February.
Fed Rate Cuts: Since September, the Fed has cut the Fed Fund Rate by 1%, with cuts happening in September, November, and December. However, at the latest meeting last week, they paused further rate cuts, leaving the Fed Fund Rate between 4.25% and 4.5%. It's essential to understand that when the Fed adjusts rates, they are changing the Fed Fund Rate, which is a short-term, overnight rate used by banks for lending. While this benchmark rate influences all other interest rates, it is not directly tied to mortgage rates, which tend to follow the 10-year Treasury bond. Interestingly, despite the Fed’s rate cuts since September, mortgage rates have actually increased over the same period.
Impact on Mortgage Rates: This week is critical for mortgage rates. President Trump’s imposed tariffs have negatively impacted the stock market but have helped bond markets, slightly lowering mortgage rates to start the week. As we navigate Jobs Week, we’ll receive the JOLTS, ADP, and BLS jobs reports, along with the latest unemployment rate to round out the week. It’s going to be a bumpy ride, but if the data turns in our favor, we might see mortgage rates continue to decrease in the near term.
Stay tuned for more updates! If you have any questions or need personalized advice, don’t hesitate to reach out to our team. We’re here to help you navigate the mortgage market with expert insights.
John Lamberg
MORTGAGE LOAN ORIGINATOR
NMLS 189233
