Mortgage Rates Get a New Threat

Higher than forecast inflation in February has some economists worried that borrowing costs will remain elevated for longer. The reading suggests that prices may take longer to slow their rate of increases before the central bank can cut interest rates.

The Consumer Price Index (CPI) inflation rose by 3.2 percent on a yearly basis last month, a 0.1 percent increase compared to January and much higher than the Federal Reserve’s target of 2 percent. Bloomberg economists had forecast a 3.1 percent acceleration in prices compared to a year ago. On a monthly basis, inflation ticked up by 0.4 percent.

Policymakers hiked rates at their most aggressive pace since the 1980s to battle inflation that had at point soared to 40-year highs in the summer of 2022. The Fed’s funds rate, which now sit at 5.25 to 5.5 percent, are at their highest in more than 20 years and have contributed to elevated borrowing costs for everything, including mortgages.

Mortgage rates hit their peak of 8 percent last fall, but fell to a mid-6 percent level towards the end of the year and in early 2024 on the back of expectation of Federal Reserve cutting rates early in the year. But as hopes of that development faded, the cost of home loans jumped to above 7 percent.

Recent weeks have shown some evidence of stabilization, but that may change after Tuesday’s inflation reading.

“Mortgage rates have similarly eased back somewhat from recent highs. Today’s inflation data is likely to reverse this trend,” Danielle Hale, chief economist at realtor.com, said in a note. “Today’s data mark a third month of upticks in the monthly rate of increase, undermining confidence that inflation is sustainably moving back to the 2 [percent] target.”

Fed chair Jerome Powell told lawmakers last week that policymakers are likely done on hiking rates, but want to be more confident that inflation is getting down to target.

“If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said.

But Tuesday’s inflation reading has some analysts doubting that those cuts will come in soon.

“The February consumer price index will not instill more confidence among the Federal Reserve members that inflation is on a sustainable path toward their 2 percent objective, reducing our subjective odds that the central bank will cut interest rates at its May meeting,” Ryan Sweet, chief U.S. economist at Oxford Economics, said in a note shared with Newsweek. “We will reassess our baseline forecast for the fed funds rate.”

On Thursday, finance company Freddie Mac pointed out that the 30-year, fixed-rate mortgage averaged 6.88 percent as of March 7, a decline from the prior week when it registered at 6.94 percent.

With the CPI coming in higher than expected, some economists are worried that the “last mile” towards that important target of 2 percent may take a while.

“Although inflation has continued to ease, much of core inflation remains ‘sticky’ and isn’t unwinding at a pace that would offer the Fed the confidence it needs to begin the easing cycle perhaps even in June,” Quincy Krosby, chief global strategist for LPL Financial, said in a note shared with Newsweek.

One silver lining from the February inflation reading was the deceleration of shelter costs, which went up by 0.4 percent compared to last month’s 0.6 percent, which could be a signal of a decline going forward.

“What could help underpin a move in June or July, however, is that Owners Equivalent Rent has begun to tick lower, and given its heavy weighting in the CPI, a continued downward trajectory by June or July could certainly assuage Fed concerns regarding inflation remaining stubbornly higher,” Krosby said.

“Today’s report suggests that while the last mile towards 2 percent has become a bit longer, the underlying report offers a modicum of hope that by June or certainly July the Fed should feel more comfortable that they’re increasingly closer to their destination,” she added.