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The latest reading of a key inflation gauge gives the Federal Reserve leeway to cut rates again next week at its final meeting of the year, but policymakers are expected to take a more cautious approach to further easing in the New Year.
The Consumer Price Index rose 0.3 percent from October to November and 2.7 percent from a year ago, in line with economists’ expectations, the Bureau of Labor Statistics reported Wednesday.
Long-awaited progress in cooling off rising rents and home prices likely gives Fed policymakers room to cut short-term rates by a quarter of a percentage point on Dec. 18, First American Senior Economist Sam Williamson said in a statement.
Sam Williamson
“However, the pace of rate cuts may slow in 2025 due to strong economic data and ongoing inflation concerns,” Williamson said.
Futures markets tracked by the CME FedWatch tool showed that as of Wednesday, Dec. 11, investors saw a 95 percent chance of a 25 basis-point Fed rate cut on Dec. 18, up from 78 percent a week ago.
Yields on 10-year Treasurys, which can serve as a barometer for where mortgage rates are headed next, climbed 3 basis points after the release of the latest CPI data, as bond market investors assessed the pace of 2025 Fed rate cuts.
A Fed rate cut next week would bring the short-term federal funds rate to a target range of 4.25 percent and 4.5 percent, down a full percentage point following a 50 basis-point cut on Sept. 18 and last month’s 25 basis-point reduction.
The Fed is scheduled to meet eight times next year, and forecasters at Pantheon Macroeconomics expect policymakers to cut rates by a quarter of a percentage point at every other meeting, which would bring short-term interest rates down by an additional 1 percentage point in 2025.
That cautious approach is unlikely to “fully stabilize the deteriorating labor market,” Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said in a note to clients. Tombs sees a risk that the Fed will be even slower to bring rates down next year if inflation data comes in hotter than forecast.
Although the Fed has already cut short-term rates by 75 basis points this year, mortgage rates have been on the rise due to bond market investors’ concerns that inflation hasn’t been tamed.
Christopher Waller
Last week Federal Reserve Governor Christopher Waller expressed similar concerns in a speech last week, noting that monthly readings on inflation “have moved up noticeably recently, and we don’t know whether this uptick in inflation will persist, or reverse, as we saw a year ago.”
“Overall, I feel like an MMA fighter who keeps getting inflation in a choke hold, waiting for it to tap out yet it keeps slipping out of my grasp at the last minute,” Waller said. “But let me assure you that submission is inevitable — inflation isn’t getting out of the octagon.”
Based on expectations Fed policymakers revealed in their last “dot plot,” the central bank “will most likely be skipping rate cuts multiple times” next year, Waller said.
“Assuming a more gradual pace of rate cuts in 2025, mortgage rates are generally expected to follow a similar path, likely settling in the mid-to-low 6 percent range by year-end,” Williamson said.
That’s a view shared by economists at the Mortgage Bankers Association and Fannie Mae, who expect mortgage rates to remain above 6 percent next year.
Mortgage rates rebound
After falling to a 2024 low of 6.03 percent on Sept. 17, rates for 30-year fixed-rate conforming mortgages bounced back to a fourth-quarter high of 6.84 percent on Nov. 6, according to rate lock data tracked by Optimal Blue.
Mortgage rates have come down slightly from the Q4 peaks seen in early November, sparking renewed interest among homebuyers. As rates retreated after the election, applications for purchase loans picked up for four weeks in a row, to the highest level since January, according to weekly lender surveys fielded by the Mortgage Bankers Association.
That streak came to an end last week, with requests for purchase loans falling by a seasonally adjusted 4 percent compared to the week before, the MBA reported Wednesday. Compared to a year ago, requests for purchase loans were up 4 percent.
Joel Kan
“Purchase applications remained relatively strong and have shown annual gains in all but one week over the past three months,” MBA Deputy Chief Economist Joel Kan said in a statement. “In addition to lower rates, purchase activity continues to be supported by sustained housing demand and inventory that continues to grow gradually in many markets.”
The pullback in rates continues to fuel refinancing, with refi requests up 27 percent week over week and 42 percent from a year ago.
Progress in fighting inflation stalls
Since hitting a 2024 low of 2.44 percent annual growth in September, the all items CPI has climbed for two months in a row, to 2.75 percent in November.
The 0.3 percent rise in the cost of shelter from October to November accounted for nearly 40 percent of the monthly increase in the all items CPI. But the 4.7 percent annual growth in the shelter index was the smallest since February 2022.
Core CPI, which excluded food and energy costs, rose 0.3 percent from October to November — as it did in the preceding 3 months. The 3.3 percent annual increase in core CPI has also been stubbornly stuck at that level for months.
Samuel Tombs
“Looking ahead, flat energy prices, falling shipping costs and the stronger dollar suggest that the near-term outlook for core goods inflation is benign,” Pantheon’s Tombs said. “In addition, the extremely low level of job postings and the falling quits rate suggest that growth in unit labor costs will continue to slow next year, reducing services inflation.”
The latest reading of the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, showed annual growth in the price of goods and services moved away from the central bank’s 2 percent target in October.
Core PCE inflation, which excludes volatile food and energy prices, “likely will remain above the 2 percent target next year if [president-elect Donald] Trump follows through on his tariff and deportation threats,” Tombs said.
While Trump has laid out plans to increase tariffs on Mexican and Canadian imports by 25 percent and on Chinese goods by 10 percent, “the reality is that tariffs likely will be threatened, imposed and removed on a wide range of countries sporadically and opportunistically,” Tombs said, limiting their inflationary impacts.
In the same vein, Pantheon forecasters believe that while Trump’s stated intention to pursue mass deportations of unauthorized immigrant workers could boost inflation “powerfully,” the “legal, practical and political barriers are too great for Mr. Trump to rapidly deport enough people to boost inflation tangibly.”
At 2.3 percent, annual inflation as measured by the PCE price index is still closer to the Fed’s target than the 21st-century peak of 7.25 percent registered in June 2022. The PCE price index data for November is scheduled to be released on Dec. 20.
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