It's All About Patience
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June 27, 2025 -- Is May's mild uptick in inflation the beginning of things to come, bearing out the Fed's stance of holding short-term rates steady for a while longer yet? There's no simple way to know, and little to do but watch and wait to see the outcome of the changes to trade and tariff policy. In his prepared remarks at the semiannual monetary report to the Congress, Fed Chair Powell reiterated: "For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance."
In his testimony, he suggested that if not for the injection of tariff and trade uncertainty that Fed might have already been in a place where rate cuts were possible. The Fed expects to see price pressures increasing as the summer moves along, but "If it turns out that inflation pressures do remain contained, we will get to a place where we cut rates sooner rather than later." Odds still strongly favor a quarter-point cut in rates come September.
Inflation did increase a little bit more in May, as evidenced by the 0.1% increase in overall Personal Consumption Expenditure prices. The as-expected bump in costs lifted the annual rate for headline PCE to 2.3%, up a tenth of a percentage point from April. Core PCE, the Fed's preferred price measure (and one that leaves out volatile food and energy costs) rose by 0.2%, it's firmest reading since February and one that pushed the annual rate up 0.1% to 2.7% again.
These annualized inflation figures had been fading over the last two months, but have now turned higher again, so it may be that the first signs of tariff-led price increases are starting to be seen. However, one month doesn't make a trend, so waiting for follow-up reports in the coming weeks is what the Fed must do. By the time the July 29-30 meeting comes, the Fed will have updates on the June Consumer and Produce Price Indexes and import and export price changes, but June PCE data isn't due out until after the meeting concludes.
Nearly regardless of whatever the Fed may or may not do anytime soon, mortgage rates remain at an elevated level, one they attained just a few weeks after the Fed first began cutting rates for this cycle, and high mortgage rates continue to stymie the housing market, keeping a lid on home sales.
Existing home sales did manage a slight increase in May, posting a 0.8% rise to a 4.03 million annualized rate of sale, although this is virtually unchanged from the last two months. A lack of affordability rather than a lack of inventory is throttling sales, as the number of homes for sale continues to rise. Currently, the 1.54 million units available -- 4.6 months of supply at the present rate of sale -- is the highest inventory-to-sales ratio since August 2016 (leaving out May 2020, the first full "closure" month of the pandemic). Despite more inventory, selling prices continue to press higher, with the median sales price of $422,800 just a stone's throw from a record high. Given the trend, it's a good possibility that we'll see a new record high price next month, but increasing inventory and seasonal effects will likely see home price declines start to show shortly thereafter.
The souring homebuilder moods we saw in last week's release of the NAHB's Housing Market Index were given context this week. Sales of new homes slumped by 13.7% in May to a 623,000 annual pace, and that from a downwardly-revised 721K sales pace in April. It may be that the whipsawing in stock markets in April and continued uncertainty about the outlook into May kept folks from buying newly-built homes, as other factors such as mortgage rates or builder incentives really didn't change much. The drop in sales saw the new home inventory-to-sales ratio balloon to 9.8 months of inventory available at the present rate of sale, with the 507,000 actual units coming on line the highest number since October 2007. Housing starts declined by about 10% in May and if new home sales don't rebound over the coming months, construction might need to be curtailed further to allow some inventory drawdown. Median sales prices of new homes kicked higher last month, with the $426,600 sticker roughly keeping pace with increases in the existing home market.
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The existing home market may yet see a little sales bump to start the summer, provided the 1.8% increase in the National Association of Realtors Pending Home Sales Index (PHSI) for May bears out. This measure of signed contracts typically leads the sales tally by a month or two, so June's increase might be reflected in July or August's sales figures. To the extent that this lag is two months, we might yet have to get past a decline in sales for June, given April's considerable decline from a stronger March pace. We'll just have to wait and see.
Overall personal incomes fell by 0.4% in May, largely due to declines in proprietor's incomes (-2.3%) and direct government transfer payments (-2.2%). Income from rental properties was also softer (-0.4%) and receipts from investment assets were unchanged, essentially leaving only worker compensation to provide support, and wages rose by another 0.4% during the month. Transfer payments declined as a result of a one-off increase in April from the Social Security Fairness Act outlays wasn't repeated; regardless, government support is up by 7.5% this year compared to last. With less income to power it, personal spending eased by 0.1%, and the nation's rate of savings took a bit of a hit, dropping four tenths of a percent to 4.5% for the month.
Amid major tariff pauses and with no immediate inflationary shock yet seen, consumer attitudes cautiously improved in May. The final June reading of Consumer Sentiment from the University of Michigan rose by 8.5 points, its first increase this year, moving away from near-historic lows to a value of 60.7 for the month. Current conditions were assessed to be more favorable, with this component posting a 5.9-point increase to 64.8, highest since February. Expectations for times to come also moved up, and more appreciably, rising from a dismal 47.9 in May to 58.1 in June, still a rather dark level but at least one up off the floor. The improvement in attitudes seems all related to inflation concerns; the one-year outlook for inflation decreased from 6.6% in May back to 5% in June, while the 5-year forecast for prices retreated to a flat 4% this month from 4.2% in May. Both remain elevated relative to where they were pre-"Liberation Day" tariff announcements, but at least somewhat less so.
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All that said, Consumer Confidence as measured by the Conference Board retreated a bit in June, with a 5.8-point decline leaving their barometer at a flat 93 for the month, squarely in the middle of three-month range. The gauge of present conditions sagged 6.4 points to 129.1, the lowest it has been since last September. The expectations measure also stepped back, retreating by 4.6 points to 69.0 for the month, but that's a level of concern seen a few times already this year alone. As with consumers in the UMich Sentiment poll, those contacted for the Confidence survey also pulled back their inflation expectations. In this case, it was a 0.4% decline to a 6% expected rate of price increases -- still quite elevated, but back to where they were in March.
The final print for first quarter 2024 GDP was out this week, and it featured a downward revision. As such, the first stanza of this year sported a 0.5% decline for GDP, almost solely due to a surge of imports to get ahead of tariff changes. Government spending also added a minor drag. It seems very likely that growth for the second quarter will come in at a fair pace, and one somewhere in the range of the economy's non-inflationary "potential", since the GDPNow figure from the Federal Reserve of Atlanta's model puts GDP at a 2.9% pace for the second quarter so far, while the Nowcast from the FRB/NY says 1.72%. Splitting the difference, figure a working estimate of about 2.3% for growth with a month of data yet to be included in both models.
Of course, the National Activity Index from the Chicago Fed says otherwise, in that it posted a -0.28 value for May, a modest improvement from a -0.36% mark for April. Both of these figures point to an economy running somewhat below potential over the last couple of months. The NAI is an amalgam of 85 economic data series, and using a par value of zero seeks to show if the economy is running above or below potential, or ability to grow without throwing off imbalances like inflation. A non-stationary target, "potential" is thought to be a GDP level perhaps as high as 2.4% but may be as lower. Wherever the present level may lie, the economy is running below it, and by this measure, has done so over the last couple of months.
Orders for durable goods powered higher in May, with the 16.4% increase goosed by a huge order for civilian aircraft. This lifted the non-defense capital goods orders figure by 49.4%, as Boeing received orders for over 300 new airplanes last month. Outside of those orders, things were much more trend-like as there was just a 0.5% increase when aircraft were excluded. That said, core capital goods orders (no defense spending, no aircraft) managed a solid increase of 1.7%, a nice rebound from an April decline and this sub-measure's largest bump since January.
June probably won't see such a bump in manufacturing at least according to the regional measures we follow. Two more Fed districts posted their factory-activity reviews for June this week and neither was all that encouraging. The Federal Reserve Bank of Richmond's local measure came in with a value of -2 for the month, a relative improvement over May's -9, but still soft enough. New orders posted a -12, up slightly from -14 a month prior, while employment conditions sagged to -5 (from -2). Prices paid by manufacturers in the Fifth District kicked higher, too.
Out in the heartland, the Kansas City Fed's similar gauge sported similar results. A one-point move higher in June left this local barometer at -2 for the month, as new orders moved up 7 points to -2, employment conditions faded by 11 points from a +3 to a -8 mark and prices paid firmed up. Come Tuesday, we'll get a national view of manufacturing conditions from the Institute for Supply Management; their gauge has been perking along at a sub-par level for the last three months, and it looks likely it'll be four in a row come Tuesday when the June data is released.
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The recent concerning rise in initial unemployment claims stepped back a little in the most recent week. The 236,000 new filings in the week of June 21 are still somewhat elevated relative to many weeks in the first half of the year, but the latest figure is the lowest since mid-May and so breaks a string of higher figures. The recent increase may or may not be related to seasonal pattern changes that have occurred since the pandemic, but it's too soon to know if that's the case, or if claims will continue to decline into the summer as they have in each of the last few years. Regardless, continuing claims for benefits continue to speak to a slack pace of new hiring, these rose again by 37,000 to 1.974 million souls receiving unemployment assistance. The calendar turns on Monday, bringing with it fresh labor conditions data, with the May JOLTS report and the June employment situation on tap before the Independence Day holiday.
New requests for mortgage credit edged higher in the week of June 20. The Mortgage Banker's Association tallied a 1.1% increase in overall mortgage applications, lifted by a 3% increase in requests for funds to refinance existing loans but dragged backward a bit by a 0.4% decline in those to purchase homes. Mortgage rates have been steady around current levels for the last 11 weeks, so a continuing tepid level of mortgage activity is about all that can be expected.
A patient approach by the Fed continues to be the case, as the central bank waits for data to either reinforce or refute its decision to stand by. Of late, there's been some rumblings from some Fed members that a rate cut in July might be a possibility, and of course the White House is agitating again for both a cut in rates and openly ruminating about replacing Chairman Powell (when he's not being berated, of course).
Current Adjustable Rate Mortgage (ARM) Indexes
| Index | For The Week Ending | Year Ago | |
|---|---|---|---|
| Jun 20 | May 23 | Jun 21 | |
| 6-Mo. TCM | 4.31% | 4.33% | 5.37% |
| 1-Yr. TCM | 4.09% | 4.13% | 5.10% |
| 3-Yr. TCM | 3.90% | 3.97% | 4.46% |
| 10-Yr. TCM | 4.40% | 4.51% | 4.25% |
| Federal Cost of Funds |
3.662% | 3.663% | 3.956% |
| 30-day SOFR (daily value) | 4.30217% | 4.32397% | 5.32968% |
| Moving Treasury Average (MTA/12-MAT) |
4.308% | 4.398% | 5.173% |
| Freddie Mac 30-yr FRM |
6.81% | 6.89% | 6.86% |
| Historical ARM Index Data | |||
It's worth considering that the haphazard way that new trade levies have been implemented is likely the strongest reason the Fed must remain patient for a longer time yet, even as it's worth remembering that short-term interest rates a quarter or even a half-point lower that present levels can do little to offset the uncertainty created by capricious enactment of policy. Lower interest rates only help at the margins if one needs to borrow money, and someone (or an entity) who is uncertain about future prospects isn't likely to want to jump in and make huge new investments or ramp up their borrowing and spending, regardless of the rate of interest.
And, of course, the Fed does not have direct control over mortgage rates, which are elevated due to those same concerns about inflation, record debt issuance, yawning fiscal deficits and a recent downgrade to the U.S. credit rating. For lower mortgage rates to come, we'll need greater certainty regarding inflation, likely accompanied by a very sluggish period of growth and coupled with trims in short-term rates that reflect a less-than-stellar outlook for near term improvement.Poor economic conditions often bring the lowest mortgage rates, but it's difficult to buy a home or refinance if you don't have a job.
All that said, the prospect for slightly lower mortgage rates again next week looks pretty good. Based on how underlying yields closed this week, it seems likely that the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac will see a decline of 4-6 basis points when the next update comes out on Thursday.
Spring has given way to the lazy days of summer, but what's the outlook for mortgage rates between now and September? Check out our latest Two-Month Forecast for mortgage rates covering July and August.
See our 2025 Mortgage and Housing Market Outlook, covering mortgage rates, housing conditions, the Fed and lots more. Our mid-year review of our expectations is coming soon.
Also, for a really long-run outlook, you'll want to review "Federal Reserve Policy and Mortgage Rate Cycles".
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