Mortgage rates ticked down this week, the latest move in a volatile market where investors are closely monitoring economic and inflation data – and the Federal Reserve’s reaction to it. Despite an uptick in inflation in January, Fed Chair Jerome Powell reaffirmed that the peak rate of the hiking cycle has been reached and that monetary policy is sufficiently restrictive to bring inflation down to the Fed’s two percent inflation target. This should ease anxieties that the Fed’s inflation forecast may have changed and that it would not be prepared to recalibrate its key policy rate later this year.

The yield on the 10-year Treasury note – which mortgage rates tend to follow – reflects expectations about future inflation and economic growth. Although three-month annualized core inflation is within striking distance of the Fed’s target, risks remain. With sustained demand pressures, the labor market remains tight, especially in the construction sector. New construction has been bridging the housing supply gap where existing homeowners have stepped back, so another slowdown in construction could prevent further house price and rent growth deceleration. Rent is roughly 40% of core inflation and single family rent growth measured by the Zillow Observed Rent Index has been accelerating since December.

Expect more rate volatility ahead as the Fed and investors continue to wait for more conclusive evidence of a return to low, stable and predictable inflation. This week’s employment and wage growth data release will likely cause some repricing activity.