Mortgage Rates Continue to Fall Following Fed Meeting

The average rate on a 30-year fixed rate conventional loan continued to fall and it's now at 7.15%. Down from a high of 7.46% just 3 weeks ago.

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Fed Hits Pause, But Another Hike Is Still in Play

The Federal Reserve left rates unchanged last week, keeping the Fed Funds Rate between 3.75% and 4.00% after September’s quarter-point hike. The vote was 10-2, with Lisa Cook and Cleveland Fed President Beth Hammack both voting for another 0.25% increase. Chairman Kevin Warsh acknowledged that inflation is still too high and economic growth remains strong, but said the Fed wants to see an “accumulation of more information” before deciding its next move. He also pointed to tighter financial conditions since September as evidence that the previous hike is already starting to have an effect.

That certainly does not mean the Fed is finished hiking. Warsh repeatedly emphasized that the Fed remains committed to getting inflation back to 2%, but he refused to provide much guidance about what happens in December. The economy remains remarkably resilient, consumer spending is healthy and the labor market is still strong, which gives the Fed plenty of room to raise rates again if inflation stays elevated. For now, the October pause looks much more like the Fed waiting for additional evidence than declaring that rates have peaked.

The market liked what it heard. Mortgage rates moved lower following the meeting, and the probability of another rate hike in December has fallen to roughly 73%. As always, that shift in expectations matters more for mortgage rates than the fact that the Fed left its own rate unchanged. If the incoming inflation and labor data give markets more confidence that the Fed can remain on hold, mortgage rates could continue moving lower. A resurgence in inflation, however, could put a December hike right back on the table.

PCE Inflation Continues to Climb

September's PCE inflation report, the Federal Reserve's preferred measure of inflation, was released Thursday, just one day AFTER the Fed decided to hold rates steady. Headline PCE rose 0.5% for the month, bringing annual inflation to 3.6%, up from 3.4% in August. Core PCE, which excludes food and energy, increased 0.3% for the month and 3.1% annually. Both readings came in right around expectations, but that's hardly good news. Inflation is moving further away from the Fed's 2% target, not closer to it. Higher gasoline and goods prices were major contributors, reinforcing Warsh's concerns that rising energy costs could spread throughout the economy.

Consumer spending also increased 0.5% in September, but once adjusted for inflation, spending was actually flat. Americans are spending more without necessarily buying more. For mortgage rates, the silver lining is that inflation didn't come in worse than expected. However, the report also reinforced why the Fed remains so cautious. Had these numbers been released before Wednesday's meeting, they would have given the two Fed members who voted for a rate hike even more ammunition. With inflation still accelerating, another hike in December remains a very real possibility.

Home Prices Lag Inflation

National home prices rose 2.1% year-over-year in August, according to the latest Case-Shiller Index, slightly better than July's 1.9% increase but still well below inflation of 3.4%. That means nationwide home values have actually declined when adjusted for inflation for 15 consecutive months. But as always, real estate is local, and the differences between markets are enormous.

Chicago led the country with prices up 6.7%, followed by New York at 6.2%, Cleveland at 4.3% and Miami at 4.2%. Meanwhile, Seattle fell 2.0%, Las Vegas declined 1.3%, and Denver and Dallas both dropped about 0.8%. The nearly 9-percentage-point gap between Chicago and Seattle shows just how divided the housing market has become. Buyers in some markets finally have meaningful negotiating power, while homeowners in hotter markets continue to see strong appreciation despite elevated mortgage rates.

What to expect this week?

This is a HUGE week for labor market data, and it could determine where mortgage rates head next. Last month's employment reports showed a surprisingly resilient labor market, helping push mortgage rates higher as markets increased their expectations for another Fed rate hike. This week, we'll find out whether that strength is continuing or if the labor market is finally starting to cool. A softer labor market would be welcome news for mortgage rates because it would give the Fed less reason to hike again in December. But if hiring remains strong and unemployment stays low, mortgage rates could give back some of their recent gains.

Key reporting dates this week:

Mon, 11/2: Manufacturing PMI, ISM Manufacturing, Construction Spending

Tues, 11/3: Job Openings (JOLTS), Factory Orders

Wed, 11/4: ADP Employment Report, U.S. Trade Balance, Services PMI, ISM Services

Thurs, 11/5: Initial Jobless Claims, Productivity and Costs, Cleveland Fed President Beth Hammack Speech

Fri, 11/6: U.S. Employment Report, Unemployment Rate, Average Hourly Earnings, Fed Officials Speaking, Consumer Sentiment, Consumer Credit

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