No Surprises from Fed

Most of the movement in mortgage rates this week again was guided by changes in oil prices. The U.S. Fed meeting was relatively uneventful, and stronger than expected inflation data had just a minor impact. Increased speculation that central banks in Europe may raise rates due to higher oil prices was negative for mortgage markets late in the week, and rates ended higher. 

As expected, the Fed left the federal funds rate unchanged at a range of 3.50 to 3.75% on Wednesday, and the meeting statement revealed no significant surprises. The challenge for officials remains how to balance persistently elevated inflation levels and a weakening labor market. Higher oil prices increase the difficulty of satisfying the dual goals, since they raise inflationary pressures and are negative for the labor market. The dot plot projections from officials indicated that they forecast just one more 25 basis point rate cut this year and one additional reduction in 2027, similar to their last set of forecasts three months ago. During the press conference following the meeting, Chair Powell said that the conflict in the Middle East increases the level of uncertainty and that it is too soon to determine its impact on the U.S. economy. 

On Thursday, the European Central Bank (ECB) held benchmark interest rates unchanged at 2.0%, down from a record high of 4.0% in the middle of 2023. This was widely anticipated, and the initial reaction was minor. In its meeting statement, the ECB said that the outlook is "significantly more uncertain" due to the conflict in Iran. However, on Friday investors began to speculate that the ECB may need to raise rates later in the year due to higher oil prices, causing global bond yields to rise.

Delayed data released this week revealed that sales of new homes in January plunged 18% from December, far more than expected and the largest monthly percentage decline since 2013. They were down 11% from one year ago, at the lowest level since 2022. The median price of $400,500 was down 7% from last year at this time. While severe winter weather depressed sales activity to some degree, this was still a disappointing report for the housing market. 

Looking ahead, attention will remain fixed on the conflict in the Middle East. Investors also will monitor comments from Fed officials about future monetary policy and from government officials about tariffs. Fed Chair Powell has a speech scheduled for Saturday. It will be a light week for economic data. New Home Sales for February will be released on Tuesday. Import Prices and Durable Orders will come out on Wednesday.