Overview: While there were no significant surprises from the economic data released over the past week, the Federal Reserve meeting was modestly favorable for mortgage markets, and rates ended the week a little lower.
On Wednesday, the Fed raised the federal funds rate by 25 basis points to a target range of 4.50% - 4.75%, the highest level since October 2007. According to the meeting statement, inflation “has eased somewhat but remains elevated.” During his press conference, Fed Chair Jerome Powell suggested that a “couple more rate hikes” are probably necessary to get to the level that is “appropriately restrictive” to bring down inflation. Investors were generally pleased with the prospect that additional rate hikes might be limited to another 50 basis points of tightening, and mortgage rates declined a bit after the comments.
The Personal Consumption Expenditures (PCE) Price Index is the inflation indicator favored by the Fed because it adjusts for changes in consumer preferences over time, and the latest report matched expectations. In December, core PCE was up 4.4% from a year ago, which was the lowest annual rate since October 2021 but still far above the Fed's stated target level of 2%.
Another significant economic report released this week from the Institute for Supply Management (ISM) hinted at slower economic growth. The ISM Manufacturing Index dropped to 47.4, a little below the consensus forecast, and the lowest reading since May 2020. Levels below 50 indicate that the sector is contracting. Rounding out the past week, gross domestic product (GDP), which is the broadest measure of economic activity, rose at an annualized rate of 2.9% during the fourth quarter. This was slightly more than the consensus forecast but down from 3.2% during the third quarter. Strength was seen in consumer and government spending, while residential investment (housing) continued to suffer from higher mortgage rates. Due to weaker recent economic reports, early forecasts are for GDP growth to decline during the first quarter of 2023.
Core PCE (annual % change)
European Central Bank meeting
ISM Services Index