Fed Rate Cut

Overview: Over the past week, a key economic report revealed that inflation was a bit lower than expected, but it caused little reaction. The Federal Reserve meeting shed some doubt on another anticipated rate cut at the next meeting in December, which was negative for mortgage markets. As a result, rates ended the week a bit higher, up from their lowest levels of the year.

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As expected, the Fed reduced the federal funds rate on Wednesday by 25 basis points to a range between 3.75% to 4%. The meeting statement emphasized the high degree of uncertainty about the economic outlook due to changes in government policies and the lack of data during the shutdown. According to the statement, economic activity has been expanding at a “moderate” pace and inflation remains “somewhat elevated.” Notably, the Fed will stop allowing its holdings of bonds to decline, as widely anticipated. After massively increasing its bond portfolio during the pandemic to boost the economy, the Fed began to shrink it in 2022 by not replacing maturing securities. Fed Chair Jerome Powell recently said that the current holdings of about $6.6 trillion in Treasuries and mortgage-backed securities are the appropriate level for the smooth operation of monetary policy. The one big surprise took place during the post-meeting press conference, when Powell stated that an additional rate cut at the next meeting is “far” from a “foregone conclusion.” Prior to that comment, nearly all investors had anticipated another 25 basis-point rate cut in December.

The Consumer Price Index (CPI) is one of the most highly anticipated measures of inflation released each month. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors generally look at core CPI, which excludes food and energy. In September, core CPI rose just 0.2% from August, below the consensus forecast. Oddly, new vehicle prices increased 0.8% from last month, but used vehicle costs fell 0.4%. Core CPI was 3% higher than a year ago, down from an annual rate of increase of 3.1% last month. Shelter (housing) costs, which make up roughly one-third of the inflation index, were 3.6% higher than a year ago. Originally scheduled for October 15, the Bureau of Labor Statistics released the crucial CPI report because it is used to calculate Social Security cost-of-living benefit adjustments. No other government data is expected to be released during the shutdown. 

In September, existing-home sales, which account for roughly 85% of the total market, rose 2% from August to the highest level in seven months. Sales were 4% higher than a year ago. The median price of $415,200 was up just a bit from this time last year. Inventory levels remain low, standing at just a 4.6-month supply nationally, well below the 6-month supply that is considered typical in a balanced market. The trend is positive, however, as inventory levels were 14% higher than a year ago. First-time homebuyers accounted for 30% of sales, up from 26% at this time last year.

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Core CPI (annual % change)

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Week Ahead

Investors will continue to monitor comments from government and Fed officials about tariffs and changes in monetary policy. The next European Central Bank meeting will take place on Thursday. With the government shutdown, it likely will be another light week for major economic data. Third-quarter gross domestic product (GDP) is scheduled for release on Thursday, and the Personal Consumption Expenditures (PCE) Price Index is scheduled for Friday. However, both reports are expected to be delayed.