Fed Holds Steady

Overview: There were no notable surprises in the Federal Reserve meeting this week, and it caused little reaction. The most significant economic report released over the past week revealed that consumer spending was weaker than expected, which was mildly positive for mortgage markets, and rates ended the week slightly lower.

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As expected, the Fed left the federal funds rate unchanged at a target range of 4.25% to 4.5%, where it has been since December. The meeting statement acknowledged that the level of uncertainty remains elevated. Officials forecast below average economic growth and above average inflation this year, forcing them to prioritize either the labor market or price levels in setting monetary policy. Overall, the dot plot projections for rate cuts this year were similar to their last set of dot plots released three months ago, but two cuts were removed from later years. Officials forecast two 25 basis-point rate cuts in 2025, one in 2026, and one in 2027.

With many consumers and businesses rushing to beat possible price hikes due to new tariffs, retail sales climbed to elevated levels in March and April. The pullback in May was even larger than expected, however. Retail sales in May dropped 0.9% from April, more than the consensus forecast for a decline of 0.6%. Significant weakness was seen in motor vehicles, building materials, and bars/restaurants, while furniture stores posted a notable increase. Looking over a longer time frame, retail sales still were a solid 3.3% higher than a year ago.

Israeli airstrikes on Iran and retaliatory attacks by Iran created some market volatility but had little net impact on mortgage rates this week. During periods of uncertainty, investors generally shift to safer assets such as bonds, which is positive for mortgage rates. In this case, however, the conflict caused oil prices to rise, increasing future inflationary pressures. This negative effect essentially offset the benefits of the flight to safety.

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Retail Sales (% change)

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Week Ahead

June 19

Mortgage markets closed for Juneteenth

June 23

Existing-Home Sales report

June 24

Consumer Confidence Index

June 25

New-Home Sales report