Overview: Over the past week, there were no significant surprises from the Federal Reserve meeting, and the major economic data caused just a minor reaction. As a result, mortgage rates ended with little change.
As expected, at Wednesday’s meeting, the Fed raised the federal funds rate by 25 basis points to a target range of 5% to 5.25%, the highest level since August 2007. The big question is whether any additional rate hikes will be needed, and the Fed provided no clear answer. According to the meeting statement, officials will decide future policy based on a number of factors including incoming economic data and developments in the banking industry. Officials expect that tighter credit conditions for households and businesses will slow economic activity and reduce inflationary pressures, so they kept their options open for the next meeting. Most investors now anticipate that the Fed will not hike rates again.
The Personal Consumption Expenditures (PCE) Price Index is the inflation indicator favored by the Fed. In March, core PCE, which excludes food and energy to reduce volatility, was up 4.6% from a year ago, matching the consensus forecast. The annual rate of increase in core PCE remains far above the Fed's target level of 2%. After peaking in September, it eased steadily for a few months, but the downward momentum then stalled. Fed officials will be watching closely to see if inflation will resume its anticipated decline later in the year.
Gross domestic product (GDP) is the broadest measure of economic activity. During the first quarter, GDP rose at an annualized rate of just 1.1%, well below the consensus forecast and down from 2.6% during the fourth quarter of 2022. Consumer and government spending were strong, while business investment and inventories revealed weakness. As a result of tighter monetary policy and troubles in the banking industry, GDP growth is anticipated to continue to weaken during the second quarter.
Core PCE (annual % change)
Week Ahead
May 4 — European Central Bank meeting
May 5 — Employment Report
May 10 — Consumer Price Index (CPI)