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Thinking about buying a home this spring? Check out the latest update to the income needed to buy a median-priced home in the top 50 metro areas.

Thinking about buying a home this spring? Check out the latest update to the income needed to buy a median-priced home in the top 50 metro areas.

Reasons To Hold

March 15, 2024 -- About four months ago, investors were convinced that the Federal Reserve would soon be cutting short-term interest rates. Most speculation focused around March as a likely starting date for the shift in monetary policy, but some believed that rates would be cuts as soon as January of this year, and that there would be perhaps six or even seven reductions by the time 2024 came to a close.

That's really no longer the case. A January move was always unlikely, and the possibilities of a March move mostly went out the window after the Fed's last get-together. After the January Fed meeting, it seemed most likely that a May cut in rates would be a fair certainty, but as least though this week, barely a majority of futures markets bets on policy now expect the first cut to come in June. and that there will now be only three (or perhaps four) rate cuts this year.

There are several reasons why the timing and expected velocity of rate cuts have been diminished. For one, and even as they gradually loosen, labor markets continue to be mostly as they were, with solid hiring, low unemployment and firm wage growth. For another, the overall economy continues to perform very well, running at a 3.2% clip through the fourth quarter of 2023 and at an estimated 2.3% clip so far for the first quarter of 2024, per the Federal Reserve Bank of Atlanta's GDPNow model.

But these happenstances would be fine -- welcomed, even -- provided inflation continued the downward pattern that was in place through the end of last year. Unfortunately, it has not. While there's been no huge rebound in price pressures, they have firmed up somewhat over the last couple of months, and that's enough to continue to give the Fed reasons to hold policy steady. If the broad economy is showing few ill effects of high interest rates (housing and a few other segments notwithstanding) and inflation isn't routinely headed toward the Fed's 2% core PCE goal, the Fed simply has fewer reasons to think that the stance of monetary policy needs adjusting.

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We learned about labor market conditions over the last few weeks, and this week, it was time for monthly updates on prices. While not the Fed's preferred gauge of inflation, the Consumer and Producer Price Indexes contain many of the same inputs, and even if they aren't quite equivalent to the PCE measures the central bank follows, they are certainly indicative enough of the trends for inflation.

After a firmer-than-expected showing in January, it was hoped that inflation at the consumer level would throttle back last month, but it didn't. The February Consumer Price Index posted a headline figure of 0.4%, a step higher even than January and the largest one-month bump since last September. The increase pushed the annual rate of CPI inflation up by a tenth of a percentage point to 3.2%; while this is little different than what we've seen over the last five of six months it also wasn't a step in the right direction. For the overall CPI figure, firmer energy costs were a large contributor. However, even excluding these and foods costs, the core rate of CPI still also managed a 0.4% increase, the same as was seen in January, Within the core measure, goods prices posted a 0.1% increase, the first one seen since last May, so falling goods prices are no longer helping to temper inflation. In addition, service costs rumbled along with a 0.5% increase and also show few signs of subsiding quickly. All that said, the 12-month trailing annual core CPI rate did actually decline 0.1% to a 3.8% annual rate, but increases such as those seen this month make it less likely that the annual decline will continue.

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While technically not directly upstream of the consumer, the Producer Price Index does reflect upstream cost inputs as goods and services are put together. The PPI for February posted an overall acceleration of 0.6%, it's biggest jump since last August, and one that lifted the annual rate of inflation at the producer level to 1.6%. While this is of course still a low level, it is also the highest this gauge has been in six months and represents a shift in the wrong direction for costs. Core goods PPI (a measure that also excludes the most volatile inputs) posted a second consecutive 0.3% increase to start 2024, and services prices also managed a firm 0.3% rise for the month. On an annualized basis, both core goods and services stepped a little further away from recent lows and no longer retreating, but the 1.6% and 2.3% annual rates (respectively) aren't yet overly concerning.

As the U.S. is a net importer of goods, changes in import costs can also lend their influence into both producer and consumer prices. As with CPI and PPI, the trend for import and export prices has also reversed a bit recently, and this change may bleed into downstream costs as we go along. Import prices were 0.3% higher in February, a more modest increase when compared to January's sizable bump, but still a second consecutive monthly rise, and the back-to-back lift came after a three-month string of declines. On a year-over-year basis, import prices are still 0.8% lower, but this is the slightest decline in a year, so falling imported goods costs are providing less inflation damping than they had been. Meanwhile, goods and services for export posted another sizable increase, rising 0.8% in February after a 0.9% spike to start the year. The annualized trend here still shows export costs to be 1.8% below year-ago levels, but this was also the smallest decline seen in over a year, so the trend of mellowing price pressures isn't as reassuring as it was for much of 2023.

Although the unemployment rate edged higher in February, this increase was more due to changes in the labor force than a sustained spate of layoffs. Even when folks do become "involuntarily separated" from their former positions, they still don't appear to be having trouble managing the gap between gigs or seem to need to use their unemployment benefits, as filings for help continue to remain very low. In the week ending March 9, only 209,000 first-time applications for unemployment assistance were filed and after a a slight bump in late January have largely reverted to trend over the last six weeks or so. This high-frequency indicator would be first to signal a deterioration in labor conditions, but there is no worrisome run-up in initial claims to be seen, and hasn't been since the pandemic breakout and recovery.

Consumer spending rebounded a little bit in February, at least as indicated by retail sales for the month. The 0.6% increase in spending was a fair turnaround from a 1.1% decline in outlays to start the year, although the gain was much more modest (0.3%) when sales at gas stations and for pricey automobiles were excluded from the calculation. The overall increase in retail sales was the largest since last September, with gains notched in most retail categories except furniture and home furnishings (slow housing market), clothing and accessories (mild winter weather for many areas), and sales from internet retailers (a second consecutive decline here). Retail sales remain in a modestly-expanding pattern, but high price levels and elevated financing costs seem likely to keep consumers more cautious with their wallets for now.

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Manufacturing continues to struggle in at least one Federal Reserve district. The Federal Reserve Bank of New York's local review of activity found less of it in March, as this barometer turned more deeply negative, dropping 18.5 points to a value of -20.9 for the month. New orders retreated, with this component declining 10.9 points to -17.2, a sixth consecutive negative mark, while employment downshifted from an almost breakeven -0.2 in February to -7.1 in March. Prices paid (an inflation measure) came in at 28.7, about the mid-point of where it has been over the last three months and a fairly modest level.

Overall industrial production managed to post a modest gain in February, increasing by 0.1%. Manufacturing output last month lifted the top-line value a bit as it posted a 0.8% increase, and mining output rebounded smartly, rising from a 2.9% decline in January to post a 2.2% increase last month. Those gains just barely overcame a 7.5% decline in utility production, as mild weather in much of the U.S. meant demand for gas and electricity were muted. With a bit of a mixed bag for IP, the percentage of industrial production floor in active used remained at 78.3% for a second month, still fairly below levels which might contribute more broadly to price pressures.

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Consumer moods had brightened considerably over the past few months, but so far in March, new happiness has seemingly been harder to achieve. The latest update on Consumer Sentiment from the University of Michigan saw a slight decline, with this indicator easing by 0.4 points to 76.5 in the preliminary March review. Current conditions were assessed as equally favorable compared to where they were in February, with this measure holding at 79.4, while the expectations portion dropped back by 0.6 points, slipping to 74.6 to start the month. Despite some recent firming of costs as detailed above, consumer inflation expectations were unchanged, with a forecast of 2.9% inflation over the next year and a 3% clip over the next five.

Despite recent modest declines, mortgage rates remain pretty high. This has seemed to be somewhat less of a deterrent to potential borrowers of late, as applications for mortgages have perked up a bit. The Mortgage Bankers Association reported a 7.1% overall increase in requests for mortgage credit in the week ending March 8, powered higher by a 4.7% increase in applications for loans to purchase homes, but also surprisingly by a 12.2% increase in those to refinance existing loans. The highest mortgage rates in about 22 years occurred just about five months ago now, and the increase in refinancing may be folks looking to improve their interest rates by up to a full percentage point compared to then, and there is likely even a bit of cash-out refinancing going on, too, as homeowners look to extract some cash from deep equity positions.

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Mar 08Feb 09Mar 10
6-Mo. TCM 5.35% 5.24% 5.27%
1-Yr. TCM 4.94% 4.84% 5.12%
3-Yr. TCM 4.31% 4.21% 4.57%
10-Yr. TCM 4.13% 4.13% 3.91%
Federal Cost
of Funds
3.876% 3.855% 2.998%
30-day SOFR (daily value) 5.31864% 5.32466% 4.52561%
Moving Treasury Average
(MTA/12-MAT)
5.088% 5.089% 3.466%
Freddie Mac
30-yr FRM
6.88% 6.77% 6.60%
Historical ARM Index Data

With the economy performing, labor markets solid and inflation apparently newly stubborn again, there's very little reason for the Fed to consider lowering rates anytime very soon. It is true that the so-called "real" rate for interest rates (nominal rate minus inflation) is both fairy high and restrictive, but it's also true that this restriction seems to be exerting only marginal drag on the economy overall. In reality, this is a good thing, since it allows for employment levels to remain high, but also a less good thing, since the current level of economic activity may perpetuate price pressures for longer and keep the Fed in a very long glide path toward policy normalization.

We'll learn a lot more about this and Fed members' outlooks for growth, unemployment, inflation and their forecasts for the appropriate level for interest rates when the updated Summary of Economic Projections is released at the close of the FOMC meeting on Wednesday. We'll cover all that and more in our typical post-meeting Fed update. Outside of that two-day affair and some housing-market updates, the economic calendar is fairly light.

Unfortunately, this week's reports covering CPI, PPI and Import and Export costs were not to the financial market's liking, and interest rates have pushed higher again. The influential yield on the 10-year Treasury moved up by about a quarter percentage point over the last five days, returning to someplace near mid-February levels. This suggests that mortgage rates will also return to those levels, and since those are about 20 basis points higher than they were this week, we'd expect to see a 15-18 basis point increase in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac next Thursday; the Fed's intimations will help determine where they head after that.

What will become of mortgage rates as winter slowly fades to spring? Have a look at out latest latest Two-Month Forecast for mortgage rates, covering February and March.

To start each year, we release our Annual Mortgage and Housing Market Outlook. In it, we take a forward look at a range of topics, including mortgage rates, Fed policy, home sales, home prices and lots more; come July, we do an interim review of our expectations. Have a look and see if you think we're off or on point with our long-range forecast.

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

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In most areas, home prices have been rising for years. If you're curious about how much home equity you have -- or will have at a future date -- you should check out HSH's KnowEquity Tracker and Projector, our unique home equity calculation and forecasting tool.

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