Nella P. from Carlsbad, NM asks: Hello Mitch, do you think the latest inflation report seals the deal for interest rates to come down in the next year? I’ve had a long-time goal of buying a second home, but missed my window when interest rates were low. Thank you.
Mitch’s Response:
It sounds like you’ve done a lot of planning over the years and are close to reaping the rewards.
The July inflation report did indeed factor as a positive for the interest rate outlook. The Labor Department reported that the consumer price index (CPI) measure of inflation rose 2.9% year-over-year, which marked the lowest reading since 2021. Core prices, which exclude volatile food and energy categories, were up 3.2% – also a three-year low.1
Markets and the Federal Reserve were encouraged by this inflation print, as it essentially confirmed inflation resuming its downward trend following a hiccup in the first quarter. But there were still some sticking points. The cost of housing, for instance, accelerated slightly from June and remains a category that’s stubbornly keeping headline inflation elevated. Housing costs account for roughly one-third of the CPI.
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Even still, I think this inflation report – coupled with the unemployment rate rising from 3.7% at the beginning of the year to 4.3% in July – have moved enough Federal Reserve officials into the camp of cutting rates at the September meeting. Between now and then, we’ll have the August jobs report, the Fed’s preferred inflation gauge (PCE price index) for July, and one more CPI print. Any further moderation of job gains and inflation in these reports will almost certainly prompt the Fed to cut.
As for your question about being in a more advantageous position as the Fed cuts rates, I do not want to get your hopes too high. The benchmark fed funds rate does indeed impact mortgage rates, but there’s a good argument that the market has already priced in a September rate cut into current 30-year fixed mortgage rates. So, I would not expect mortgage rates to decline all that much if the Fed cuts rates by 25 basis points, for instance.
What you should watch for, however, is whether a rate cut in September comes as a unanimous decision, and what officials stay about expectations for rate decisions at the final two meetings of the year, in November and December. If the Federal Reserve emerges from the September meeting with a dovish tone, and we also see softer inflation readings into the fall with more of a weakening pattern in the labor markets, then I think you will see a more significant impact on mortgage rates.
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Disclosure
1 Wall Street Journal. August 14, 2024. https://www.wsj.com/economy/central-banking/inflation-july-cpi-report-interest-rate-00cd3a84?mod=hp_trending_now_article_pos5
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