There was no expectation that a change in monetary policy was coming at the conclusion of the Federal Reserve meeting week, and none came. Investors and observers were instead focused on the update to Fed members' Summary of Economic Projections (SEP), where each of 19 Federal Open Market Committee (FOMC) participants provide their outlooks for economic growth, unemployment, inflation, and their expectation of the path of monetary policy going forward.
The updated SEP did feature some changes to the picture. Released with the closing of the March meeting, the last SEP still showed expectations for as many as three cuts in short-term interest rates in 2024. Since then, inflation reports have tended to come in on the high side of hopes and expectations, and so the updated SEP now only forecasts one or perhaps two cuts in interest rates this year. Under usual circumstances, a diminished outlook for rate cuts might have cause disappointment among investors, sending yields higher, but markets took the news in stride.
They did so because the Consumer Price Index for May came in a little cooler than expected, a hopeful sign that the warmer spate of inflation to start 2024 is beginning to subside. Released right in the middle of the two-day Fed meeting, the CPI for May showed no change in prices last month, largely due to falling energy costs. This helped the annual rate for CPI return to 3.3%, a tenth of a percentage point lower than April and another step down after a near-term March peak of 3.5%. Perhaps more encouraging was so-called "core" CPI, a measure that strips out volatile energy and food costs. While this measure showed a 0.2% increase for last month, it was the smallest rise since last October and helped annual core CPI to drop back to a 3.4% rate, the lowest it has been since August 2021. While prices of goods saw an accelerating decline, those for services remained sticky; they have in essence changed little for many months now, so perhaps only cautious enthusiasm is the proper state of mind regarding inflation trends.
Although the more "hawkish" stance by the Fed may seem at odds with a somewhat more benign inflation situation, it's important to keep in mind that Fed member SEP projections may have been submitted before the May inflation update. FOMC members can change their outlooks to incorporate last-minute data, and "some" likely did, according to Fed Chair Powell, but "most" did not. Of course, this is also only one datapoint in what are likely a good number of them that are incorporated into members' projections, and one report -- even a good one -- likely isn't enough to change the immediate picture very much.
Investors and financial markets seem to like where things are headed. Inflation settling back again should allow market-based interest rates (and mortgage rates) to ease a bit, while the growing hope for lower financing costs later this year should help add more oomph to the stock market, at least in general. The treasury and bond yields that most influence mortgage rates all cheered the improvement in inflation for May, and it looks as though mortgage rates are headed lower this week. Given where last week finished, a reasonable expectation is that the average offered rate for a conforming 30-year FRM as reported by Freddie Mac will decline by 8 to 10 basis points by the time Thursday's weekly update comes out.
