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Mortgage rates were trending up Friday after the latest reading of the Federal Reserve’s preferred gauge of inflation showed the economy continued to cool in July — but at a gentle enough pace that Fed policymakers are now seen as likely to be content to only bring rates down by a hair in September.
The personal consumption expenditures (PCE) price index showed prices of goods and services were up 2.5 percent in July from a year ago — just half a percentage above the Fed’s 2 percent target, the Commerce Department’s Bureau of Economic Analysis reported.
While that’s no better than June, the year-over-year measurement is getting harder to budge because of the sharp deceleration in inflation seen in the second half of 2023, KPMG U.S. Chief Economist Diane Swonk said in a bulletin.
“Federal Reserve Chairman Jay Powell has warned that those ‘base effects,’ as they are called, will buoy year-over-year measures of inflation through year-end,” Swonk said. “Those base effects drop out of the data at the start of 2025, which is why we don’t need a big improvement in inflation on a monthly basis from here to get much closer to the Fed’s 2 percent target in early 2025.”
Inflation nearing Fed’s 2 percent target
Housing and utilities were the biggest contributors to the increased cost of services, while cars, auto parts, food, and beverages were the biggest drivers of higher costs for goods.
Core PCE, which excludes the cost of food and energy and can be a more reliable indicator of underlying inflation trends, rose 2.62 percent from a year ago, compared to a revised 2.58 percent in June.
The 0.16 percent increase in core PCE from June to July was in line with forecasts tallied by The Wall Street Journal, Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients.
“Consumers’ spending growth has been running well ahead of real income growth for some time, which has only been possible due to a drop in the personal saving rate to a very low level,” Shepherdson noted.
At 2.9 percent in July, the savings rate is “unsustainably low” compared to just over 6 percent before the pandemic, Shepherdson said.
Pantheon economists predict that ongoing softening in the labor market will lead to more precautionary saving that should dampen growth in consumption “significantly over the next few quarters.”
The article discusses the latest trends in mortgage rates and inflation in the United States. It mentions that the Federal Reserve’s preferred gauge of inflation, the PCE price index, showed a slight increase of 2.5 percent in July, which is just above the Fed’s 2 percent target. The article highlights that the increase in prices of goods and services was driven by housing, utilities, cars, auto parts, food, and beverages.
The article also mentions that the core PCE, which excludes food and energy costs, rose by 2.62 percent from a year ago. It further discusses the Federal Reserve’s plan to cut rates in September to maintain price stability while keeping a strong labor market. Federal Reserve Chair Jerome Powell indicated that the timing and pace of rate cuts will depend on incoming data and the evolving outlook.
The article predicts that the Fed will reduce the federal funds rate by 25 basis points in September, followed by bigger cuts in November and December. It also notes that the federal funds rate reached a 23-year high after 11 consecutive rate increases from March 2022 to June 2023. The article mentions that the recent decline in mortgage rates has led to a reduction in the spread between mortgage rates and 10-year Treasury yields. This has reduced prepayment risk on loans taken out today.
Overall, the article provides insights into the current economic situation in the United States, particularly in terms of inflation, interest rates, and the housing market. It indicates that the Federal Reserve is closely monitoring these trends and taking measures to maintain economic stability while supporting growth.
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