Author: Eric BernsteinPublished:
Rates ended the week flat as markets digested a hawkish first Fed meeting from Warsh, weaker housing construction data, and falling oil prices. Warsh came off much more hawkish than markets expected, with the Fed sounding less like it’s looking for reasons to cut and more like it’s willing to keep rates elevated. Housing data also showed construction slowing sharply, another sign that high mortgage rates are still weighing on the market. The silver lining was oil, which moved lower as the U.S. and Iran made progress toward reopening the Strait of Hormuz and potentially ending the war. Lower oil prices are good for inflation, and lower inflation is what mortgage rates need most right now. We’ve been burned by “deal progress” headlines before, so we’ll see if it actually holds, but for now the market is taking it as good news.
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Warsh Came Off A Bit Harsh
Warsh's first Fed meeting as Chair is in the books, and interest rates spiked after he came off more hawkish than markets expected. The Fed didn’t actually raise rates, holding steady at 3.50%–3.75%, but the message was clear: this is no longer a Fed looking for reasons to cut.
The updated “dot plot” showed the committee split, with half of Fed officials now expecting at least one rate hike this year, while inflation projections moved higher. Warsh also repeatedly emphasized “price stability,” which is Fed-speak for keeping inflation under control, even if that means keeping rates higher for longer.
The bigger surprise was how much Warsh changed the tone of the Fed. He removed much of the forward guidance markets are used to relying on, declined to submit his own rate projection, and announced several task forces to overhaul how the Fed communicates, tracks data, handles its balance sheet, and thinks about inflation. None of those are immediate policy moves, but they were big market signals.
Less guidance means more uncertainty, and more uncertainty means more volatility in bonds and mortgage rates. The 2-year Treasury yield jumped sharply after the meeting, and mortgage rates followed, because markets are now realizing Warsh may be more willing to hike, or at least keep rates elevated, than they previously expected.
Housing Construction Hits the Brakes
Housing construction slowed sharply in May, which is a mixed bag for homebuyers. Overall housing starts dropped 15.4% to the lowest level since 2020, with single-family starts falling to an eight-month low and multifamily construction plunging even harder. Builders are getting squeezed by high mortgage rates, weak buyer demand, elevated inventory in some markets, and higher material costs from tariffs and imported inflation. The bad news is that less building makes the long-term housing shortage worse, which can keep prices supported. The good news is that builders pulling back is another sign that high rates are doing real damage to housing, and that kind of weakness can eventually put pressure on the Fed and mortgage rates to move lower.
Iran Deal Update
The U.S. and Iran made real progress in Switzerland, agreeing to a 60-day roadmap aimed at turning last week’s memorandum into a final deal. Negotiators set up working groups for nuclear issues, sanctions, and dispute resolution, while also creating a deconfliction mechanism meant to stop military operations in Lebanon and keep the Strait of Hormuz open.
Oil prices remain around the $75 mark, which is better news for inflation and therefore mortgage rates, though we'd like to see them fall farther from here. The deal is by no means complete, violence in Lebanon needs to stop, and technical talks are expected to continue all week before anything becomes final.
What to expect this week?
After last week’s Fed meeting, markets get another important week of economic data. The biggest report by far is Thursday’s PCE inflation data, which is the Fed’s preferred inflation gauge. Expect volatility as any news on the Iran deal could move markets one way or another.
Tuesday starts with S&P manufacturing and services PMI, which will give markets a fresh read on whether businesses are still expanding despite higher rates, tariff pressure, and geopolitical uncertainty.
Wednesday brings new home sales, which will be important after last week’s weak housing starts report showed builders pulling back. If new home sales come in soft too, it would be another sign that higher mortgage rates are still weighing heavily on housing.
Thursday is the big day. Markets get jobless claims, personal income, personal spending, durable goods, revised GDP, and most importantly PCE inflation. Headline PCE is expected to rise 0.4% for the month and 3.8% year-over-year, while Core PCE is expected to rise 0.2% for the month and 3.3% year-over-year. A hotter-than-expected report would likely push rates higher, while a softer number could help calm inflation fears and give rates some relief.
Friday wraps up the week with trade, inventory, and consumer sentiment data. Consumer sentiment has been weak, and inflation expectations inside that report will matter because the Fed is watching whether consumers believe inflation is becoming sticky again.
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