Fed Holds Rates, Inflation Eases - June 2024 Update

Welcome to our weekly review of economic highlights affecting mortgage rates and the housing market. Last week brought significant developments from the Federal Reserve, alongside key inflation and employment data. Here’s a breakdown of what transpired:

Federal Reserve Actions and Projections

The Federal Reserve opted to maintain its benchmark Federal Funds Rate between 5.25% to 5.5%, marking the seventh consecutive meeting without a change. Despite tamer inflation figures, Chair Jerome Powell indicated a potential rate cut later in 2024, depending on sustained inflation trends. The latest "dot plot" projections from Fed members suggest one rate cut by year-end, down from previous forecasts, underscoring cautious optimism regarding economic stabilization.

Consumer and Wholesale Inflation Trends

May's Consumer Price Index (CPI) displayed encouraging signs, with the headline figure remaining flat and annual inflation declining to 3.3%. Core CPI, which excludes volatile food and energy prices, rose 0.2%, signaling a slowdown in inflationary pressures driven by moderating costs in motor vehicle insurance. Similarly, the Producer Price Index (PPI) for wholesale inflation declined by 0.2%, with core PPI unchanged, reflecting subdued inflation at the production level.

Employment Dynamics

Initial jobless claims unexpectedly rose to a 10-month high, with 242,000 new claims filed last week, surpassing forecasts. Continuing claims also increased, highlighting a potential slowdown in hiring momentum and posing implications for future labor market stability. These developments underscore the Federal Reserve's dual mandate of achieving price stability and maximum employment.

Small Business Sentiment

The NFIB Small Business Optimism Index improved to 90.5 in May, though remaining below historical averages. Small business owners expressed heightened concerns about future economic conditions, with inflation cited as a primary operational challenge for 22% of respondents. Despite increased optimism, lingering economic uncertainties continue to weigh on business sentiment and investment decisions.

Outlook for Mortgage Rates

Looking ahead, mortgage rates may see stability in response to the Fed's cautious approach and favorable inflation data. Market participants will monitor upcoming economic reports, including the Personal Consumption Expenditures (PCE) index due on June 28, which could further influence monetary policy decisions.