Mortgage rates surged this week on a hotter than expected consumer price index report. Although inflation has been easing toward the Federal Reserve’s two percent target, consumer price inflation accelerated in January, erasing any doubts that the first Fed rate cuts will likely have to be postponed.
The yield on the 10-year Treasury note – which mortgage rates tend to follow – reflects expectations about future inflation and economic growth. Rate cuts that the market expected in the first half of this year may simply not materialize, because strong January economic data raised the risk that disinflation could be stalling. As a result, yields and mortgage rates soared. Mortgage rates bottomed in the last week of December and have trended up ever since.
“Despite higher rates, the housing market seems to be picking up some steam ahead of the home buying season. This time last year the constraint on housing activity came from absent sellers. New listings are higher this year, giving buyers more options. If layoffs remain low, and core inflation continues to moderate, housing market activity should rebound modestly this spring – with slightly lower price growth but more sales.
Core inflation measured by the Personal Consumption Expenditures (PCE) index – the Fed’s preferred gauge for inflation – had been running below target for the past 3 months. Be ready: the release of the PCE report in two weeks will likely cause more rate volatility.