Inflation, along with a robust jobs report for September, is prompting the Federal Reserve to reconsider the pace of cutting the Federal Funds Rate, according to Windermere’s Principal Economist Jeff Tucker.
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Key figure for today: 2.4 percent.
This is the annual CPI inflation rate for September, indicating the increase in the Consumer Price Index compared to one year ago. It was a slight decrease from 2.5 percent in August, but it outperformed the consensus forecast of 2.3 percent.
Another important metric is the implied annual inflation rate based on the monthly change, which stands at 2.2 percent. It has shown some volatility, including periods of overheating in Q1, but overall, it has been moderate enough to bring down the annual inflation rate.
Since its peak at 9.1 percent in the summer of 2022, inflation has been on a gradual decline. While the recent decrease is a positive development, the Fed is still concerned that it’s not dropping fast enough.
Coupled with the strong September jobs report discussed earlier, the Fed is now considering a more measured approach to cutting the Federal Funds Rate, especially after the initial half-point cut made in September.
There is even speculation that the Fed may pause on further rate cuts at their upcoming meeting in November.
The combination of a resilient labor market and a slower decline in inflation is leading to an increase in long-term yields, such as mortgage rates. This brings us to another significant figure: 6.64 percent.
As of Friday, October 11, the 30-year mortgage rate stood at 6.64 percent, according to Mortgage News Daily. While it has risen by about half a point in the past month, it is still down by a full point compared to this time last year.
For mortgage rates to resume their downward trend, we will likely need to see evidence of inflation cooling down or signs of a weakening labor market, or possibly both. The increase in interest rates was driven by a strong economy that may have been running too hot, so a more substantial cooldown is necessary to bring rates back down.
Jeff Tucker serves as the Principal Economist for Windermere Real Estate in Seattle, Washington. Connect with him on X or Facebook.