Rates Moved Higher Today, But This Week Was a Step in The Right Direction

Mortgage rates spiked abruptly last week after several economic reports showed the economy doing better than expected. Now this week, key inflation data showed prices falling faster than expected. Rates responded with a full recovery despite giving up some of the improvement on Friday after strong Consumer Sentiment data. If rates could only choose one thing to be afraid of, it would be inflation.  Rates are based on bonds.  Bonds offer investors a fixed schedule of cash flow.  Over time, inflation can make that cash buy much less “stuff” than it did at first.  Investors compensate by demanding higher rates of return, and that is essentially the short version of the great post-covid rate spike. Up until this week, the most closely-watched inflation metric had been consolidating in an increasingly narrow, sideways pattern, but still at elevated levels.  While it’s only one month of data, this is the promising breakout that fans of low rates have been hoping to see.  In one fell swoop, the monthly pace of inflation is back at the lowest levels since early 2021. Year-over-year inflation is also looking good, especially when energy and food prices are factored into the mix (blue line below): The chart above illustrates the predicament for policymakers.  The Fed sets short term rates in an attempt to constrain the economy and push inflation back to an annual pace of 2%.  They focus on core inflation (orange line).  As seen in the chart, we’re still quite a ways from 2%, and it will take another year of reports like the one we just saw before we’re back in that range.  So the Fed has to decide if the current level of the Fed Funds Rate is enough to get us there with certainty.
Source: mortgagenewsdaily.comNew feed