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Mortgage rates and yields on long-term bonds retreated Friday after the Federal Reserve’s preferred measure of inflation showed prices rose less sharply in November than expected.
At 2.4 percent, annual growth in the Personal Consumption Expenditures (PCE) price index was up from 2.3 percent in October, the Bureau of Economic Analysis reported Friday.
But the 0.11 percent month-over-month uptick in core PCE, which excludes volatile food and energy prices, was the smallest since May.
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One reason core inflation rose less in November than forecasters had been expecting was that housing costs are rising at a slower pace, Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said in a note to clients.
Samuel Tombs
“Fundamentally, the near-term inflation outlook is benign,” Tombs said. “Energy prices are flat, the labor market is continuing to cool, catch-up growth in rents is fading and supply chains are operating normally. Tariffs and deportations, however, threaten to disturb the tranquility.”
Yields on 10-year Treasury notes, a barometer for mortgage rates, fell by as much as 9 basis points after the latest inflation numbers were released. An index compiled by Mortgage News Daily showed rates on 30-year fixed-rate mortgages falling by 10 basis points Friday, to 7.04 percent.
That could provide some welcome relief for would-be homebuyers, who saw rates climb Wednesday and Thursday after Federal Reserve policymakers approved the third rate cut of 2024, but warned that they expect to take a more cautious approach to cutting rates next year.
Mortgage rates bounce back
Rates for 30-year fixed-rate conforming mortgages hit a 2024 low of 6.03 percent on Sept. 17 on expectations for Fed rate cuts, according to rate lock data tracked by Optimal Blue.
But once the Fed did start cutting, mortgage rates came roaring back, as bond market investors who fund most mortgages weighed the prospect that the Fed may have difficulty making more progress in achieving its goal of bringing inflation down to 2 percent next year.
Adding to those concerns are investors’ worries that tax cuts, tariffs and deportations proposed by President-elect Trump could prove to be inflationary.
Economic projections released this week detailing Fed policymakers’ expectations for growth, unemployment and inflation suggest that they share those concerns, Wall Street Journal reporter Nick Timiraos told PBS News Hour anchor Geoff Bennett.
Fielding questions at a press conference Wednesday, Federal Reserve Chair Jerome Powell said some Fed policymakers were taking Trump’s proposed policies into account in their economic projections, while others were not.
“But the analysts I spoke to after the meeting said there hasn’t been enough of a change in the economy in the last couple of months to warrant the shift in the inflation forecast that they produced today,” Timiraos said Wednesday. “And so it does seem like they’re taking on board more Trump-related policy change.”
Uptick in annual inflation
Annual inflation, as measured by the PCE price index, hit a 2024 low of 2.1 percent in September before ticking up in October and November.
Annual core PCE, which excludes the cost of food and energy, was essentially flat at 2.8 percent in November.
Forecasters at Pantheon Macroeconomics expect core PCE inflation to fall to about 2.5 percent in March “before then edging slightly higher over the remainder of the year,” Tombs said. “Bolder action on tariffs, or large-scale deportations, represent key upside risks to this forecast.”
Lawmakers on Friday were negotiating a last-minute funding bill to avoid a government shutdown after a Trump-backed bill that would have lifted the debt ceiling failed to pass a House vote.
Lifting the debt ceiling would help Trump fulfill a campaign promise to extend 2017 tax cuts that are forecast to add $4 trillion to the national debt over the next decade, NPR’s Scott Horsley reported.
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