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Latest CPI reading leaves door open for December Fed rate cut

1 month ago 12

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Bond market investors are more confident the Federal Reserve has leeway to cut rates one more time this year after the release of inflation data Wednesday showing prices rose in line with forecasters’ expectations in October.

The Consumer Price Index (CPI) report for October isn’t likely to have much impact on mortgage rates, as investors who fund most home loans remain skeptical that the Fed will have much room to bring rates down next year.

The latest reading of the all items CPI index showed rising housing costs helped drive prices up by a seasonally adjusted 0.2 percent from September to October, and by 2.6 percent from a year ago.

“Shelter remains a significant hurdle in reducing overall inflation, contributing to over half of the monthly increase in all items,” First American Senior Economist Sam Williamson said in a statement.

‘All items’ and core CPI edge up


The all items CPI had previously dropped to 2.44 percent in September, the lowest reading since February 2021. Core CPI, which excludes more volatile food and energy costs, also edged up by 0.3 percent from September to October, and by 3.3 percent from a year ago.

Sam Williamson

“Although shelter inflation continues to decline and is at its lowest level since May 2022, the pace of decline has slowed in recent months, limiting the potential decrease in headline and core CPI in the months ahead,” Williamson said.

Yields on 10-year Treasury notes, a barometer for mortgage rates, hardly budged on the news, rising two basis points to 4.45 percent. Rates for 30-year fixed-rate mortgages came down by one-hundredth of a percentage point, averaging 7.01 percent Wednesday, according to lender data compiled by Mortgage News Daily.

Since hitting a 2024 low of 6.03 percent on Sept. 17, mortgage rates have been on the rise despite two recent Federal Reserve rate cuts, denting both homebuyer and refinancing demand.

But applications for purchase loans picked up slightly last week — by 2 percent, after a seasonal adjustment — compared to the week before, according to surveys by the Mortgage Bankers Association.

Looking back a year, purchase loan demand is up by only 1 percent, despite the fact that rates have come down considerably from a 2023 peak of 7.83 percent registered on Oct. 25.

Mortgage rates climbing

Joel Kan

“Mortgage rates continued to increase last week, driven by higher Treasury yields as financial markets digested the likely impacts of a Trump presidency,” MBA Chief Economist Joel Kan said, in a statement.

Last week’s Fed rate cut “was already anticipated and did little to move the markets,” Kan said.

Demand for refinancing has fared better, MBA data shows. Although refi applications were down 2 percent last week compared to the week before, demand was up 43 percent from a year ago.

More Fed easing expected


After raising the federal funds rate 11 times between March 2022 and July 2023 to fight inflation, Federal Reserve policymakers cut the short-term federal funds rate by half a percentage point on Sept. 18 and by another quarter point on Nov. 7.

The central bank is expected to cut short-term rates by an additional 25 basis points when Fed policymakers wrap up their final meeting of the year on Dec. 18.

Futures markets tracked by the CME FedWatch tool on Wednesday put the odds that Fed policymakers will refrain from cutting rates next month at just 18 percent, down from 41 percent on Tuesday before the release of the latest CPI data.

If the Fed does cut rates in December, futures market investors now see a 72 percent chance that policymakers will make at least one more rate cut by May 7, down from 98 percent on Oct. 11.

The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, showed the annual increase in the cost of goods and services dropped to 2.1 percent in September — the lowest level of inflation since February 2021.

That’s very close to the Fed’s goal of bringing inflation down to 2 percent. But core PCE has been more stubborn in coming down, hovering at around 2.7 percent since July.

PCE data for October is scheduled for release on Nov. 27.

Long-term interest rates on government debt and mortgages have been on the rise even as the Fed cuts short-term rates while bond market investors weigh data that suggests the economy is not cooling as rapidly as it did earlier in the year.

Another worry is that tariffs, tax cuts and deportations promised by President-elect Donald Trump will be inflationary.

Economists at Pantheon Macroeconomics say that with inflation risks “overwhelmingly to the upside,” they now expect Fed policymakers to lower rates by 25 basis points in December, but pause in January.

Samuel Tombs

“Looking ahead, Mr. Trump’s economic policy agenda threatens to prevent core PCE inflation from returning to the Fed’s 2 percent target next year, though elevated political uncertainty means the range of possible outcomes is extremely wide,” Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said in a note to clients Wednesday.

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