Mortgage rates have some room to come back down in June after PCE price index shows annual inflation easing to 2.65 percent in April, and Q1 2024 GDP growth revised downward to 1.3 percent.
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Mortgage rates have some room to come back down in June after a key inflation metric moved in the right direction in April, reviving speculation in bond markets that the Fed will start cutting rates as soon as September.
The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred gauge of inflation, eased to 2.65 percent in April, the Commerce Department’s Bureau of Economic Analysis reported Friday.
That’s only a slight improvement from the 2.70 percent annual growth registered in March, but the PCE price index is once again inching closer to the Fed’s 2 percent inflation target. The index had previously dipped to 2.46 percent in January, before moving in the wrong direction in February and March.
PCE and Core PCE trending down
Core PCE, which excludes the cost of food and energy and can be a more reliable indicator of underlying inflation trends, dropped to 2.75 percent in April and has been steadily falling since January.
Ian Shepherdson
“The inflation numbers alone will not be low enough to trigger a Fed easing by September — payroll growth will need to slow markedly, too,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients. “But that’s also our base case, given the clear weakening in the employment components of key business surveys.”
Futures markets tracked by the CME FedWatch Tool on Friday showed investors are pricing in a 53 percent chance of at least one Fed rate cut by Sept. 18, up from 46 percent on April 30. But futures markets, which at the beginning of the year were predicting six Fed rate cuts totaling 1.5 percentage points, now see little chance (11 percent) that the Fed will cut rates by more than half a percentage point.
Forecasters at Pantheon Macroeconomics maintain that as the economy continues to cool, the Fed will bring its target for the short-term federal funds rate down by 1.25 percentage points by the end of the year, and that rates on 10-year Treasury yields will drop to 3.25 percent.
Mortgage rates and Treasury yields also dipped on Thursday after the Bureau of Economic Analysis revised downward its estimate of first-quarter gross domestic product (GDP) annual growth, from 1.6 percent to 1.3 percent, saying consumer spending rose less than previously estimated.
Yields on 10-year Treasurys, a useful barometer for mortgage rates, have dropped by 14 basis points this week to 4.5 percent, down from Wednesday’s high of 4.64 percent. A basis point is one-hundredth of a percentage point.
An index maintained by Mortgage News Daily showed rates on 30-year fixed-rate mortgages dropped 5 basis points Thursday and another 12 basis points on Friday.
Loan lock data tracked by Optimal Blue lags by a day but shows that after surging through the 7 percent mark Wednesday, rates on 30-year fixed-rate loans dipped Thursday and were headed back below 7 percent.
While still well below the 2024 high of 7.27 percent registered on April 25, the rebound in mortgage rates in the second half of May put off some would-be homebuyers.
Requests for purchase loans have posted three consecutive week-over-week declines, according to recent surveys of lenders by the Mortgage Bankers Association (MBA).
Mortgage forecasts diverge
MBA and Fannie Mae forecasters differ on where rates are headed next, with MBA economists predicting on May 16 that mortgage rates have room to drop to 6.5 percent by the end of this year and below 6 percent by the end of 2025.
Fannie Mae economists predicted in a May 13 forecast that rates on 30-year fixed-rate loans won’t drop below 7 percent until next year.
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