Mortgage rates increased for the first time in May as the latest FOMC minutes caused investors to reassess their forecasts for inflation and the economic outlook. April data showed inflation is once again moving in the right direction. But there are still questions among Fed committee members about whether policy is restrictive enough to bring inflation down to the 2-percent target. That’s causing investors to reassess their views.
Long-term interest rates, like mortgage rates, depend on expected inflation and economic growth. Although a moderation in consumer spending is expected to pull inflation lower, progress on inflation has been modest at best in the first quarter.
Expect more rate volatility ahead as the Fed and investors wait for more conclusive evidence of a return to low, stable and more predictable inflation. Financial markets still expect at least one or two central bank rate cuts this year. Next week’s PCE inflation report will likely cause some repricing activity.