The final week of the year brought a whirlwind of economic updates, leaving a noticeable impact on mortgage markets. With surprises in monetary policy, mixed signals from consumer behavior, and shifting housing trends, here’s a breakdown of what happened and what it means for the financial landscape moving forward.
Hawkish Fed Signals Push Mortgage Rates Higher
As widely expected, the Federal Reserve reduced the federal funds rate by 25 basis points on Wednesday, lowering it to a target range of 4.25% to 4.50%. While the actual rate cut was long anticipated and already priced into financial markets, the real drama came from the updated projections.
The Fed’s “dot plot,” which charts officials’ expectations for future rate cuts, took a more hawkish turn. Previously forecasting four 25-basis-point cuts for 2025, officials now expect just two. This unexpectedly cautious approach signaled tighter monetary policy in the near term, catching investors off guard and pushing mortgage rates to their highest levels in six months.
While this hawkish stance surprised markets, the Fed’s cautious approach reflects ongoing concerns about inflationary pressures.
Inflation Shows Improvement but Challenges Persist
The Federal Reserve keeps a close watch on inflation through its preferred gauge, the Personal Consumption Expenditures (PCE) price index. November’s Core PCE rose just 0.1% from October, below expectations, and marked a 2.8% increase from a year ago—well below its peak earlier this year but still above the Fed’s long-term target of 2.0%.
The last time inflation hit the Fed’s target was February 2021, highlighting the challenges of bringing inflation fully under control. While the latest inflation data offers a glimmer of hope, the Fed remains cautious, signaling that achieving further progress will require continued vigilance.
Consumer Spending Remains Resilient
Despite rising prices and higher credit card rates, U.S. consumer spending has shown remarkable resilience. Retail sales in November rose 0.7% from the previous month, exceeding expectations, and were up 3.8% compared to last year.
Several sectors saw notable strength, including:
- Autos: Demand surged partly due to replacements for vehicles damaged by hurricanes.
- Online Shopping: A steady favorite among consumers.
- Sporting Goods and Hobbies: Reflecting an ongoing interest in leisure activities.
With this momentum, another robust holiday shopping season is expected, bolstering confidence in the consumer-driven economy.
Mortgage Market Snapshot
The housing market showed signs of activity in November, despite the challenges of higher mortgage rates and tight inventory. Existing home sales climbed 5% from October and were 6% higher than a year ago. The median price of existing homes rose to $406,100, marking a 5% increase from the same time last year.
Inventory levels, however, remain a persistent issue. Nationally, housing supply is at just 3.8 months, far below the six months typically associated with a balanced market. On a positive note, inventory levels were 18% higher than a year ago, offering some hope for buyers navigating this competitive market.
Looking Ahead
As the year winds down, investors will continue to watch for signals from the Fed about future monetary policy. Although economic reports are light for the remainder of December, key updates on New Home Sales and Durable Goods Orders will arrive on Tuesday.
Mortgage markets will close early on Tuesday and remain closed on Wednesday in observance of Christmas.
What It All Means For The Mortgage Market
The final economic updates of the year underscore a complex financial environment. The Fed’s cautious outlook for rate cuts suggests inflation remains a top concern, even as consumer spending and housing market activity defy expectations. For mortgage markets, the combination of higher rates and low inventory means buyers and borrowers face continued challenges in the near term.
As we enter the new year, all eyes will be on how the Fed balances its dual mandate of controlling inflation and supporting economic growth. For now, the message from officials is clear: achieving price stability remains a priority, and the path to monetary easing will be gradual.
