Inflation cooled in September, nearing the Fed’s 2% target

19 hours ago 1

Mortgage rates inch up as an expected decline in key inflation gauge does little to change expectations for rate cuts among investors who fund most home loans.

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Bond market investors shrugged and mortgage rates inched up Thursday even as the Federal Reserve’s preferred measure of inflation showed annual growth in the price of goods and services continued to descend toward the central bank’s 2 percent target in September.

The Personal Consumption Expenditures (PCE) price index showed the price of goods and services rose by 2.1 percent in September — the lowest level of inflation since February 2021.

But the decline in the PCE price index, which registered 2.3 percent in August and 3.4 percent a year ago, was expected — and had little impact on investors who fund most mortgages.

Yields on 10-year Treasurys, a barometer for mortgage rates, were up two basis points to 4.29 percent Thursday afternoon. Rates on 30-year fixed-rate mortgages were up seven basis points Thursday, to 7.09 percent, according to an index published by Mortgage News Daily.

Harvard economics professor Jason Furman said the latest inflation numbers are open to interpretation.

“Overall one’s view of inflation still depends on whether you believe the last several months are accurate and older data lagged [or was] irrelevant — in which case you feel good,” Furman said in a post on the social media platform X. “Or the last several months are noisy and opposite of the quirks that elevated Q1 — in which case you’re nervous.”

Inflation drops to lowest level in 3 years


Core PCE, which excludes the cost of food and energy, has been stuck at 2.7 percent since July — raising concerns that inflation could worsen again as it did earlier this year.

A former economic adviser to President Barack Obama and a nonresident senior fellow at the Peterson Institute for International Economics, Furman said he believes the underlying inflation rate is around 2.5 percent, “with downward pressure.”

“Inflation is much less of a threat than it was a year or two ago,” Furman said. “But it appears to be a greater threat than recession.”

Futures markets tracked by the CME FedWatch tool show investors continue to expect two modest Fed rate cuts totaling a half percentage point this year.

Economists at Pantheon Macroeconomics think the economy is cooling faster than Fed policymakers realize, and that they will follow up their 50 basis-point rate cut on Sept. 18 with cuts totaling 75 basis points in November and December.

The “low level of food and energy prices, frictionless supply chains, cooling new rent inflation and the ongoing loosening of the labor market suggest that the outlook for core PCE inflation is fundamentally benign,” Pantheon Chief U.S. Economist Samuel Tombs said in a note to clients Thursday.

Another data release Thursday from the Bureau of Labor Statistics — the Employment Cost Index (ECI) — showed the annual increase in workers’ total compensation dropped below 4 percent for the first time in three years, Tombs noted.

“Recent solid growth in productivity means that labor costs already are rising slowly enough for core PCE inflation to fully return to the Fed’s 2 percent target,” Tombs said. “The low level of the quits rate and the job postings-to-unemployment ratio suggest that growth in ECI private wages and salaries will continue to slow, increasing the risks of a period of below 2 percent core PCE inflation next year.”

The U.S. economy grew at a healthy, but slower-than-expected, pace of 2.8 percent during the third quarter, according to an advance estimate of gross domestic product (GDP) released Wednesday by the Commerce Department.

Fed policymakers will also be considering payroll and unemployment data set to be released Friday at their Nov. 7 meeting. Hurricanes Helene and Milton and a strike by Boeing machinists are expected to dent payrolls and generate more jobless claims.

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