Wednesday's Fed meeting resulted in positive news for mortgage rates. Mixed economic data released over the past week was roughly neutral. Mortgage rates ended the week lower.
As expected, the Fed did not change the federal funds rate. However, the statement contained guidance which reduced the expected number of rate hikes in 2016 from four to two. Reasons for this included a downgraded outlook for U.S. economic growth and inflation, as well as concerns about the pace of global economic growth. The statement was good news for mortgage rates, as this guidance pushes tighter monetary policy further into the future, including the expected timeline for the Fed to begin to reduce its large holdings of mortgage-backed securities (MBS) and Treasuries. The added demand for MBS from the Fed helps to keep mortgage rates low.
Fed officials have stated that they would like to see inflation rise to their target level of 2.0%. After holding steady for most of 2015, core inflation has increased pretty quickly over the last few months. In February, the core consumer price index (CPI), a widely followed inflation measure, unexpectedly rose to an annual rate of 2.3%, the highest level since May 2012. Core inflation excludes the volatile food and energy components.
However, Fed officials prefer a different monthly indicator, the core PCE price index. This index measures a broader scope of prices and rebalances the category weightings more frequently than CPI. The most recent reading for core PCE showed a 1.7% annual rate in January. The results for February will be released on March 28. Core PCE has generally run about half a point lower than core CPI.
Looking ahead, Existing Home Sales will be released on Monday, and New Home Sales will come out on Wednesday. Durable Orders, an important indicator of economic activity, will be released on Thursday. The third estimate of fourth quarter Gross Domestic Product (GDP) will come out on Friday.