Amidst the ongoing Iran conflict now in its second week, market instability persists due to uncertainties surrounding oil prices and inflation, both of which have a ripple effect on the economy, impacting mortgage rates.
According to data provided to BW by Zillow, the average rate on a 30-year fixed-rate mortgage increased by seven basis points to 5.98% APR in the week ending March 12. A basis point equals one one-hundredth of a percentage point.
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Steady Inflation in February
We are currently between two crucial inflation data releases: the Consumer Price Index (CPI) released on March 11 and the upcoming Personal Consumption Expenditures (PCE) report on March 13. These reports assess inflation in slightly different ways, with PCE being the preferred measure by the Federal Reserve.
The February CPI came in line with expectations at 2.4%, indicating no significant acceleration or deceleration in inflation. However, economic data functions like a rearview mirror, reflecting past trends rather than future developments. The February CPI and PCE represent snapshots of the economy prior to the Iran conflict.
Elizabeth Renter, BW’s senior economist, notes, “This data acts as a benchmark to gauge the impact of the Iran war on energy prices and beyond. Prolonged conflict increases the risk of pushing overall inflation upwards.”
Challenges Ahead for the Fed
Federal Reserve officials will convene on March 17-18 to assess key economic indicators, such as the labor market and inflation, and make decisions accordingly. Given unexpected job losses and inflation slightly above their comfort level, policymakers are expected to maintain the federal funds rate.
Renter explains, “If the current data were the sole source of inflation information during the upcoming Fed meeting, it would not significantly alter discussions. However, ongoing threats to price stability, particularly from the military conflict, must be considered.”
With a murky economic outlook, the Fed faces a delicate balancing act. While a weakening labor market could prompt rate cuts, the risks to inflation posed by the Iran conflict necessitate cautious decision-making. When uncertainty looms, a gradual approach is often safer than sudden shifts, regardless of external pressures for rate adjustments.
(Photo by Majid Saeedi / Getty Images News)
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