top of page

Big Reaction to Fed Forecast

Overview: Wednesday’s Federal Reserve meeting contained no policy changes, but some officials projected that tighter monetary policy may be seen sooner than expected, which caused mortgage rates to rise. The major economic reports on inflation and retail sales released over the past week were roughly in line with the expected levels and had little impact.


As widely expected, the Fed did not change the federal funds rate or adjust the size of its monthly bond purchases. However, investors reacted strongly to the latest forecasts from officials regarding the outlook for future monetary policy. Thirteen out of 18 officials now expect that the Fed will begin raising the federal funds rate before the end of 2023, up from just seven in the prior set of forecasts in March. The rapid recovery of the economy from the effects of the pandemic and the resulting increase in inflation caused the change in their projections. Loose monetary policy helped mortgage rates reach record-low levels last year, and a tighter monetary policy is viewed as negative for rates.

Regarding current inflation levels, the Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In May, core CPI, which excludes the volatile food and energy components, increased 0.7% from April, above the consensus forecast for an increase of just 0.5%. Core CPI was 3.8% higher than a year ago, up from an annual rate of increase of 3% last month, and the highest reading since 1992. The question remains as to whether the pickup in inflation is mostly due to temporary factors or longer-term influences.

Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of the strength of the economy, and the most recent results were mixed. In May, retail sales fell 1.3% from April, below the consensus forecast for a decline of just 0.6%, but the figures for April were revised significantly higher. With the reopening of the economy, consumers are shifting their spending from goods, which are included in retail sales, to services such as travel and eating out, which are not.

While there is an enormous need for more homes in many areas, the pace of construction fell a bit short of expectations in the latest report. In May, housing starts rose 4% from April, and building permits fell 3%. Builders blamed higher costs and shortages of lumber and other materials for slowing their efforts to provide homes more quickly.


Core CPI (annual % change)

Week Ahead

June 22 — Existing-Home Sales report

June 23 — New-Home Sales report

June 25 — Core Personal Consumption Expenditures (PCE) Price Index



bottom of page