Annual inflation in the U.S. dropped to its lowest level in more than three years last month, increasing the odds of a September interest rate cut that would bring relief to mortgage markets.
In the 12 months through June, the consumer price index rose 3%, according to data released by the Department of Labor on Thursday. It was the lowest annual increase in prices since March 2021.
On a monthly basis, overall prices dropped 0.1% in June from May, the first monthly decline since the onset of the COVID-19 pandemic in spring 2020. Costs for energy and vehicles dropped on both a monthly and annual basis, offsetting rising housing prices.
Prices for shelter, which make up more than a third of the index, continued to rise last month under the Labor Department’s method of calculating housing costs. Rent rose 5.2% from a year ago, while owner’s equivalent rent, a measure of what homeowners would pay to rent their own residence, was up 5.4%.
For potential homebuyers, the overall cooling of inflation toward the Federal Reserve’s 2% target could mean incoming relief from higher mortgage rates. The central bank is now viewed as extremely likely to slash a quarter point from its current benchmark rate of 5.3% when policymakers meet in September.
“Prospective homebuyers have been eagerly waiting for a drop in borrowing costs,” says Bright MLS Chief Economist Lisa Sturtevant. “Mortgage rates will fall when the Fed cuts interest rates … but it is also possible to see mortgage rates come down even before the actual Fed rate cut, if the central bank assertively telegraphs their intentions.”
Mortgage rates generally follow yields on the 10-year Treasury note, which move in response to investor expectations about inflation, the economy, and future Fed rate moves. Yields on the 10-year dropped on Thursday morning after the new inflation data.
Average rates on 30-year fixed mortgages stood at 6.95% for the week ending July 3, more than double their level three years ago, according to Freddie Mac.
Fed chair signals rate cuts on the horizon
Earlier this week, Fed Chair Jerome Powell testified on Capitol Hill as part of his twice-yearly report to Congress on the state of the economy.
In his remarks, Powell highlighted softening in the U.S. labor market, after the unemployment rate ticked up for the third straight month, hitting 4.1% in June.
The labor market "has cooled really significantly across so many measures," Powell told the Senate Banking Committee on Tuesday. "We are well aware that we now face two-sided risks."
His comments highlighted the Fed's dual mandate to keep both inflation and unemployment low, and signaled that policymakers could soon cut rates to prevent rising layoffs and a recession.
"Today’s inflation reading underscored Fed Chair Powell’s recent remarks that both the risks to the economy and the supply and demand of goods and services are coming into better balance," says Realtor.com Chief Economist Danielle Hale.
"Combined with the more moderate June jobs report, this data should build Fed confidence that its target is in sight, and could pave the way for a signal in the July Fed statement that a rate cut is on the horizon," continues Hale. "This should help improve interest rates, like mortgage rates, much sooner, especially if the data continue on this trend."
In his testimony, Powell struck a cautious tone, saying that officials don't expect to cut rates until they are certain that inflation is "moving sustainably" toward the Fed's 2% goal. Still, this was a dovish shift in language from his previous statements, noted Sturtevant.
"There is a notable distinction between 'moving sustainably toward 2%' and 'hitting 2%,' and by using this language, Chairman Powell has escalated expectations that the central bank is almost ready to cut the Federal funds rate," she says.
Bond markets still view a rate cut at the Fed's next meeting in late July as unlikely. But investors now price in a 79% probability of a quarter-point rate cut at the central bank's September meeting, according to the CME FedWatch tool.
Read more at Realtor.com
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