After the PCE price index showed that the annual inflation rate fell back to 2.65% in April and the GDP growth rate in the first quarter of 2024 was revised down to 1.3%, there is still some room for mortgage rates to fall in June.
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Mortgage rates still have some room to fall in June after a key inflation gauge moved in the right direction in April, reigniting bond market speculation that the Federal Reserve could begin cutting interest rates as early as September.
The U.S. Department of Commerce’s Bureau of Economic Analysis reported on Friday that the Federal Reserve’s preferred inflation indicator, the personal consumption expenditures (PCE) price index, fell back to 2.65% in April.
That’s only a slight improvement from March’s 2.70% annual rate, but the PCE price index is once again close to the Fed’s 2% inflation target. The index previously fell to 2.46% in January before trending in the wrong direction in February and March.
PCE and core PCE trend downward
Core PCE, which excludes food and energy costs and is a more reliable indicator of underlying inflation trends, fell to 2.75% in April and has been declining steadily since January.
Ian Shepherdson
“Inflation data alone will not be enough to trigger the Fed to ease policy in September, and wage growth will also need to slow significantly,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to clients. “But this is also our fundamental situation, as the employment portion of the key business survey softened markedly. “
Futures markets tracked by CME’s FedWatch tool on Friday showed investors expected a 53% chance that the Fed would cut interest rates at least once before September 18, up from 46% on April 30. 1.5 percentage points, but there is now a slim chance (11%) that the Fed will cut rates by more than half a percentage point.
Forecasters at Pantheon Macroeconomics believe that as the economy continues to cool, the Federal Reserve will lower its short-term federal funds rate target by 1.25 percentage points before the end of the year, and the 10-year Treasury yield will also fall to 3.25%.
On Thursday, the Bureau of Economic Analysis lowered its first-quarter gross domestic product (GDP) annual growth forecast to 1.3% from 1.6%, saying consumer spending increased less than previously expected, and mortgage rates and Treasury yields also fell.
The 10-year Treasury yield, a useful barometer of mortgage rates, has fallen 14 basis points this week to 4.5%, down from Wednesday’s high of 4.64%. A basis point is one hundredth of a percentage point.
An index maintained by Mortgage News Daily showed 30-year fixed-rate mortgage rates fell 5 basis points on Thursday and another 12 basis points on Friday.
Loan lock-in data tracked by Optimal Blue lags a day, but shows rates on 30-year fixed-rate loans eased Thursday, back below 7%, after surging to the 7% mark on Wednesday.
While still well below the 2024 high of 7.27% set on April 25, a rebound in mortgage rates in the second half of May deterred some potential homebuyers.
Purchase loan requests have declined for three weeks in a row, according to the Mortgage Bankers Association’s (MBA) most recent survey of lenders.
Mortgage forecasts diverge
MBA and Fannie Mae forecasters disagree on where rates will go next, with MBA economists predicting on May 16 that there is room for mortgage rates to fall to 6.5% by the end of this year and to 6.5% by the end of 2025. Below 6%.
In a May 13 forecast, Fannie Mae economists predicted that interest rates on 30-year fixed-rate loans would not fall below 7% until next year.
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