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The latest readings on key inflation indicators give the Federal Reserve room to cut rates again at its final meeting of the year next week, but policymakers are more cautious about further easing in the new year. It is expected that a similar approach will be taken.
The Consumer Price Index rose 0.3% from October to November, the Bureau of Labor Statistics said Wednesday, up 2.7% from a year earlier, in line with economists’ expectations.
Sam Williamson
Sam Williamson, senior economist at First American, said in a statement that long-awaited progress in calming rising rents and home prices prompted Fed policymakers to cut short-term interest rates by a quarter on Dec. 18. He said there is a high possibility that there will be room to reduce points.
“However, the pace of rate cuts may slow in 2025 given strong economic data and continued concerns about inflation,” Williamson said.
As of Wednesday, Dec. 11, investors believed there was a 95% chance the Fed would cut interest rates by 25 basis points on Dec. 18, up from 78% a week ago, according to futures markets tracked by the CME FedWatch tool. %.
The 10-year Treasury yield, which can be a barometer of where mortgage rates go next, rose 3 basis points after the release of the latest CPI data, as bond market investors assess the pace of Fed rate cuts in 2025. .
If the Fed cuts rates next week, the short-term federal funds rate would be in its target range of 4.25% and 4.5%, an additional 1 percentage point cut following a 50 basis point cut on September 18 and a 25 basis point cut last month. . .
The Fed is scheduled to meet eight times next year, and forecasters at Pantheon Macroeconomics expect policymakers to cut interest rates by a quarter of a percentage point at every other meeting. In 2025, short-term interest rates will fall by another 1 percentage point. .
Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, said in a note to clients that such a cautious approach is unlikely to “fully stabilize a deteriorating labor market.” Toombs said he sees a risk that the Fed’s interest rate cuts next year will be further delayed if inflation data turns out to be higher than expected.
The Fed has already cut short-term interest rates by 75 basis points this year, but mortgage rates are rising as bond market investors worry that inflation is unchecked.
christopher waller
Federal Reserve President Christopher Waller expressed similar concerns in a speech last week, saying that the monthly inflation rate has “increased significantly recently, and it remains to be seen whether this increase in inflation will continue or not.” I don’t know if it will turn around,” he said. A year ago. ”
“Overall, I feel like a mixed martial artist who keeps pumping air in a choke hold, waiting for it to release, but keeps slipping out of my hands at the last moment,” Waller said. said. “But let me assure you that submission is inevitable. Inflation has not left the octagon.”
Waller said the Fed “will most likely skip multiple rate cuts” next year, based on expectations laid out by Fed policymakers in a previous “dot plot.”
“Assuming a slower pace of rate cuts in 2025, mortgage rates are likely to follow a similar path, settling in the mid to low 6% range by year-end,” Williamson said.
This view is echoed by economists at the Mortgage Bankers Association and Fannie Mae, who predict that mortgage rates will remain above 6% next year.
Mortgage interest rates recover
According to rate lock data tracked by Optimal Blue, 30-year fixed-rate conforming mortgage rates fell to a 2024 low of 6.03% on Sept. 17, before falling to a fourth-quarter rate on Nov. 20. It rebounded to a record high of 6.85%.
Mortgage rates have fallen slightly from the fourth-quarter peak seen in November, sparking renewed interest among homebuyers. Applications for purchase loans rose for the fourth consecutive week, to the highest level since January, as interest rates peaked after the election and have since fallen, according to the Mortgage Bankers Association’s weekly lender survey.
Purchase loan applications fell a seasonally adjusted 4% week over week, ending that streak last week, the MBA said Wednesday. Compared to a year ago, applications for purchase loans increased by 4%.
Joel Kang
“Purchase requests remain relatively strong, with annualized increases in all but one of the past three months,” MBA Deputy Chief Economist Joel Kang said in a statement. “In addition to lower interest rates, purchasing activity continues to be supported by sustained demand for housing and inventory that continues to gradually increase in many markets.”
Lower interest rates continue to stimulate refinancing, with refinance requests increasing 27% week over week and 42% year over year.
Progress in the fight against stalled inflation
Since recording the lowest annual growth rate of 2024 at 2.44% in September, the all-item CPI has increased for the second consecutive month, reaching 2.75% in November.
The 0.3% increase in housing costs from October to November accounted for nearly 40% of the monthly increase in all-item CPI. However, the annual growth rate of 4.7% in the shelter index was the lowest since February 2022.
Core CPI, which excludes food and energy costs, rose 0.3% from October to November, in line with the previous three months. The 3.3% annualized increase in core CPI has also stubbornly remained at that level for several months.
samuel’s tomb
“Looking forward, flat energy prices, lower transportation costs and a stronger dollar suggest a positive near-term outlook for core goods inflation,” Pantheon’s Toombs said. “Furthermore, extremely low job openings and declining turnover suggest that unit labor cost growth will continue to slow next year, keeping service inflation under control.”
The latest reading of the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s preferred inflation measure, showed annual growth in the prices of goods and services moving away from the central bank’s October target of 2%. It was shown that
Core PCE inflation, which excludes volatile food and energy prices, is “likely to remain above the 2% target next year.” [president-elect Donald] Trump is sticking with his threats of tariffs and deportation,” Toombs said.
President Trump has said he plans to raise tariffs by 25% on imports from Mexico and Canada and 10% on Chinese goods, but “the reality is that tariffs are sporadic and opportunistic against a wide range of countries.” “They are likely to be threatened, imposed, and abolished.” Mr Toomes said it would limit the impact on inflation.
Similarly, Pantheon’s forecasters said that while President Trump’s stated intention to pursue mass deportations of undocumented immigrant workers could “strongly” boost inflation, “there are no legal, practical or , believes the political barriers are too high for Mr. Trump to deport enough people quickly enough to drive up inflation. This is visible inflation. ”
Annual inflation, as measured by the PCE price index, was 2.3%, still closer to the Fed’s target than the 21st century peak of 7.25% recorded in June 2022. PCE price index data for November is scheduled to be released on December 20th. .
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