Fed Reaction

As expected, the Fed reduced the federal funds rate by 25 basis points on Wednesday to a target range of 4.25% to 4.50%, and the changes to the meeting statement were relatively minor. Investors were focused on the dot plot projections for future rate cuts. Officials scaled back their forecasts to just two additional 25 basis point rate cuts in 2025 from four 25 basis point rate cuts in their last set of dot plots released three months ago. While the anticipated rate cut this week was priced into financial markets long ago, the outlook from officials was more hawkish (favoring tighter monetary policy) than expected, and this surprise caused mortgage rates to rise.

Fed officials keep a close eye on inflation, and the PCE price index is their favored indicator. In November, Core PCE rose just 0.1% from October, below expectations. Core PCE was 2.8% higher than a year ago, the same annual rate of increase as last month. While far below its recent peak, further progress toward the 2.0% target of the Fed remains challenging, and this desired level has not been achieved since February 2021.

Despite higher prices and credit card rates, consumer spending has shown few signs of slowing in recent months. In November, retail sales rose a solid 0.7% from October, above the consensus forecast, and were 3.8% higher than a year ago. Particular strength was seen in autos (partly due to demand to replace cars damaged by hurricanes), online merchants, and sporting goods/hobbies. Investors expect another strong holiday shopping season.

In November, sales of existing homes rose 5% from October and were 6% higher than a year ago. The median existing-home price of $406,100 was up 5% from last year at this time. Inventories remain stuck at historically low levels, standing at just a 3.8-month supply nationally, far below the 6-month supply typical in a balanced market. On a brighter note, though, inventories were 18% higher than a year ago.

Week Ahead

Investors will continue to look for additional guidance from Fed officials on their plans regarding future monetary policy. For economic reports, it will be a very light schedule for the remainder of the year. New Home Sales and Durable Orders will come out on Tuesday. Mortgage markets will close early on Tuesday and will be closed on Wednesday for Christmas.

We would like to thank Peter Costakos and his partner, MBSQuoteline for their insightful information.

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