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Investors Welcome Policy Shift

Overview: Over the past week, the Federal Reserve meeting revealed forecasts from officials for looser monetary policy, which was favorable for mortgage markets. The major inflation data was slightly weaker than expected, which also was positive for mortgage markets. As a result, rates ended the week lower.


As expected, the Fed made no change in the federal funds rate on Wednesday, and the statement released after the meeting was very similar to the prior one. Investors were focused on what the new forecasts from officials would show, and the news was favorable for mortgage markets. The latest “dot plots” indicated that officials now expect three 25 basis-point rate cuts next year, a significant change from just one anticipated cut in the prior set of forecasts released three months ago. While investors have been pricing in three or four rate cuts in 2024 for some time, it was not clear from recent comments whether officials shared a similar outlook. In short, Fed officials did shift a long way toward investor expectations with today’s comments. 

The Consumer Price Index (CPI) is one of the most widely followed inflation indicators. Mostly due to lower energy prices, CPI in November was just 3.1% higher than a year ago, down from an annual rate of increase of 3.2% last month. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors often prefer to look at core CPI, which excludes the food and energy components. Core CPI was 4% higher than a year ago — the same annual rate as last month — and the lowest level since September 2021. Stubbornly high shelter (housing) costs were up 6.5% from a year ago and again were responsible for the largest portion of the increase. While the core CPI annual rate has fallen significantly from its peak in September 2022, it remains far above the readings around 2% seen early in 2021, which is the stated target level of the Fed.

In November, the economy added 199,000 jobs (above the consensus forecast of 180,000), but the results for prior months were revised lower. The unemployment rate declined from 3.9% to 3.7%, below expectations for a flat reading. Average hourly earnings were 4% higher than a year ago, the same annual rate of increase as last month and the lowest level since June 2021. Fed officials closely track wage growth because it generally raises future inflationary pressures.


Core CPI (annual % change)

Week Ahead

December 14

European Central Bank meeting

Retail Sales report

December 19

New Residential Construction Report (also known as Housing Starts)

December 20

Existing-Home Sales report

December 22

New-Home Sales report

Personal Income and Outlays

Personal Consumption Expenditures (PCE) Price Index


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