No Surprises from Fed

The Fed meeting on Wednesday revealed no unexpected news, and its impact on mortgage markets was minor. Inflation data delayed a bit by the government shutdown far exceeded expectations, but it also caused little reaction. As a result, mortgage rates ended the week nearly unchanged.

After reducing the federal funds rate by 25 basis points at each of the last three meetings, the Fed held it steady at a range of 3.50% to 3.75% as expected. There were no significant surprises in the meeting statement, which contained a small improvement in the outlook for economic growth. It also noted a more even balance of risks between their mandates of low unemployment and stable inflation. The statement from the prior meeting described potential labor market weakness as the greater threat. Investors anticipate that the next federal funds rate cut will take place in June. In addition, President Trump on Friday nominated Kevin Warsh to succeed Jerome Powell as Fed Chair when his term ends in May. 

An inflation indicator released this week, which measures wholesale costs for producers, came in far above the expected levels. The December core Producer Price Index (PPI) jumped 0.7% from November, well above the consensus forecast of just 0.3% and the largest monthly increase since July. Core PPI was 3.3% higher than a year ago, up sharply from an annual rate of 3.0% last month and also the highest level since July. Core PPI remains well above the 2.0% target level of the Fed. However, the reaction was minor since investors tend to place a lot more weight each month on the Consumer Price Index report, which better reflects overall inflation levels in the economy. 

Of note, the decline was widely spread across ages and income groups. In particular, the outlook for future labor market conditions weakened. The number of people who feel that jobs are difficult to find rose to the highest level since February 2021 during the pandemic.

Looking ahead, investors will continue to monitor comments from Fed officials for hints about future monetary policy. For economic reports, the ISM national manufacturing sector index will be released on Monday and the services sector index on Wednesday. The key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation are always closely watched.