Inflation Eases, Spending Surges
There was one final week this year packed with major economic news, and it was a wild one. On the negative side for mortgage markets, the Fed sharply scaled back its outlook for monetary policy easing, and consumer spending exceeded expectations. More favorably, the latest inflation data was lower than forecasted. The net effect was that mortgage rates reached their highest levels in six months.
Fed Cuts Rates
As expected, the Fed reduced the federal funds rate by 25 basis points last Wednesday to a target range of 4.25% to 4.50%, and the changes to the meeting statement were relatively minor. Investors were focused on the dot plot projections for future rate cuts. Officials scaled back their forecasts to just two additional 25 basis point rate cuts in 2025 from four 25 basis point rate cuts in their last set of dot plots released three months ago. While the anticipated rate cut last week was priced into financial markets long ago, the outlook from officials was more hawkish (favoring tighter monetary policy) than expected, and this surprise caused mortgage rates to rise.
PCE 2.0% Target Remains Elusive
Fed officials keep a close eye on inflation, and the PCE price index is their favored indicator. In November, Core PCE rose just 0.1% from October, below expectations. Core PCE was 2.8% higher than a year ago, the same annual rate of increase as last month. While far below its recent peak, further progress toward the 2.0% target of the Fed remains challenging, and this desired level has not been achieved since February 2021.
Spending Shows Strength
Despite higher prices and credit card rates, consumer spending has shown few signs of slowing in recent months. In November, retail sales rose a solid 0.7% from October, above the consensus forecast, and were 3.8% higher than a year ago. Particular strength was seen in autos (partly due to demand to replace cars damaged by hurricanes), online merchants, and sporting goods/hobbies. Investors expect another strong holiday shopping season.
Existing Home Sales Rise
In November, sales of existing homes rose 5% from October and were 6% higher than a year ago. The median existing-home price of $406,100 was up 5% from last year at this time. Inventories remain stuck at historically low levels, standing at just a 3.8-month supply nationally, far below the 6-month supply typical in a balanced market. On a brighter note, though, inventories were 18% higher than a year ago.
Mortgage Rates for the week of 12-23-2024