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Mortgage rates could be poised to retreat from 2024 highs after a key measure of inflation showed the economy continued to cool in January.

The personal consumption expenditures (PCE) price index increased 0.3 percent from December to January, and was up 2.4 percent from a year ago, the Commerce Department’s Bureau of Economic Analysis reported Thursday.

That’s an improvement from 2.6 percent annual growth in December, and shows the Federal Reserve’s key inflation metric continues to move in the right direction and is nearing the Fed’s 2 percent inflation target.

PCE and Core PCE trending down

Core PCE, which excludes the cost of food and energy and can be a more reliable indicator of underlying inflation trends, dipped to 2.8 percent, the lowest reading since March 2021.

The increase in core PCE “was juiced by problematic seasonals” Moody’s Analytics Chief Economist Mark Zandi posted on X, the social media platform formerly known as Twitter.

“Abstracting from the measurement issues, underlying inflation appears close to 2.5 percent annualized. Within hailing distance of the Fed’s 2 percent target,” Zandi wrote. “And everything points to continued moderation in inflation. Time for the Fed to begin cutting interest rates.”

Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients that the latest inflation numbers are in line with the company’s big-picture view that “core inflation is falling and will continue to slide, thanks to the pass-through from slowing wage gains, improving supply chains, and margin re-compression.”

While Pantheon has forecast that the Fed will begin bringing interest rates down in May, Shepherdson said there’s an increasing chance that they’ll delay. Fed policymakers are “hyper-cautious” after having predicted that pandemic-fueled inflation would be transitory only to see it continue rising into 2022.

The CME FedWatch Tool, which tracks futures markets to gauge the odds of the Fed’s next moves, puts the odds of one or more Fed rate cuts by May 1 at just 22 percent, down from 88 percent at the end of January.

Yields on 10-year Treasurys, a barometer for where mortgage rates are headed next, dropped five basis points Thursday immediately following the release of the latest PCE numbers, touching a low of 4.22 percent for the day. Yields on the 10-year Treasury had previously hit a 2024 peak of 4.35 percent on Feb. 22, the highest rate since Nov. 30.

An index maintained by Mortgage News Daily showed rates on 30-year fixed-rate mortgages dropped five basis points Thursday, to 7.10 percent.

While still far below a 2023 peak of 7.83 percent registered on Oct. 25, rates on 30-year fixed-rate mortgages are up nearly 50 basis points from a recent low of 6.50 percent registered on Feb. 1, according to loan lock data tracked by Optimal Blue.

Optimal Blue data shows rates on 30-year fixed-rate loans averaged 6.93 percent on Wednesday — the highest level registered by that index so far this year.

The run-up in mortgage rates has led to five consecutive week-over-week declines in purchase loan applications, the Mortgage Bankers Association (MBA) reported Wednesday.

Mortgage rates expected to fall

Source: Fannie Mae and Mortgage Bankers Association projections, February 2024.

Fannie Mae economists are forecasting that mortgage rates will retreat below 6 percent this year but that they won’t come down much more in 2025. In a Feb. 20 forecast, MBA economists projected mortgage rates won’t drop below 6 percent in 2024, but will fall more steeply next year to an average of 5.5 percent in Q4 2025.

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Email Matt Carter

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