Slowdown in U.S. inflation a trend, not blip

The recent slowdown in U.S. inflation was not just a “momentary blip,” according to Chicago Federal Reserve President Austan Goolsbee. The top Fed official spoke to the Financial Times last week and said it’s indisputable the deceleration in inflation is a trend. Goolsbee rejected the idea efforts to return inflation to the central bank’s 2% target were coming to a halt.  

“There is a lot saying that inflation is trending down compared with what it has been and that’s what we want,” Goolsbee said. “It’s undeniable this is a trend. It wasn’t a one-month blip. …we have to hope and keep an eye out to make sure that continues.”

The central bank is now in an environment where, even if it keeps the fund rate locked, inflation will cool, according to Mortgage Bankers Association (MBA) Chief Economist Mike Fratantoni. 

“The Fed is already at a place where if they do nothing and inflation holds or falls farther from here, they are going to be slowing the rate of growth, and the cumulative impact of the rate increase they have already made is not fully felt yet,” Fratantoni said at the MBA Annual Conference in Philadelphia. 

On a monthly basis, inflation rose 0.4% in September, and housing costs were a main factor to the overall price increase. Goolsbee recognized that a reversal in rental and other housing inflation following months of easing was a “negative surprise” earning a “proper element of caution.”

The Federal Open Market Committee (FOMC) voting member added that the Fed could curb inflation without seeing economic hardship, but worried oil prices may continue their upward trend amid rising tensions in the Middle East. “Oil price shocks and external shocks have derailed soft landings that were easier than this one,” Goolsbee said. 

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THE FED IS LIKELY DONE WITH INTEREST RATE HIKES: MBA FORECAST

Fed unlikely to raise rates in November

Some experts are suggesting the Federal Reserve is getting closer to hitting its 2% inflation target. Fratantoni said the Fed may reach its target by early 2025 and is likely ending its restrictive monetary policy. Fratantoni was doubtful there would be a November rate hike and said there was a low probability the central bank would raise rates in December. 

The 10-year Treasury reached a new high of 4.8% recently, and is also expected to change direction, Fratantoni noted. He anticipates the key benchmark to fall below 4% by the end of 2023. Fratantoni said he expected a downward trend from mortgage rates in 2024 and 2025. 

“This is the bottom of the cycle,” Fratantoni said. “Our view is that the Fed’s done and they’re going to stick at this 5.25% to 5.5% fund rate. This does run counter to their suggestion at their last meeting in September, where they put out a projection saying median members still think one more hike, but if you listen to the speeches that they’ve given the last couple of weeks, even some of the more hawkish members are saying long end of the curve has increased so much that’s doing our work for us and we probably don’t need to hike anymore right now.” 

Philadelphia Fed Reserve President Patrick Harker spoke at the MBA Annual Conference in Philadelphia last Monday. Harker said interest rates can remain untouched if economic and financial conditions continue on their current path. 

“And so far, economic and financial conditions are evolving as expected, perhaps a tad better,” Harker said. He explained that though the central bank’s efforts over the past 18 months to bring down inflation added to the present housing finance environment, disinflation is taking shape and the Fed’s interest rate policy is filtering into the economy.

“It will continue with inflation dropping below 3% in 2024 and leveling out at our 2% target,” he said. Thereafter, however, there can be challenges in assessing the trend of disinflation. For example, September’s CPI report came out modestly on the upside, driven by energy and housing. 

The Federal Reserve left the federal funds rate at a 22-year high of 5.25% to 5.5% during its September meeting. Released minutes from its September meeting indicate the Fed will “proceed carefully” in determining whether to raise rates further. 

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PHILADELPHIA FED PRESIDENT HARKER BELIEVES INTEREST RATES SHOULD HOLD STEADY 

Mortgage rates affected by fiscal policy

The federal government is collecting smaller revenues and increasing its spending, having a heavy impact on mortgage rates this fall. The deficit has climbed roughly 60% compared to 2022 and the government is spending approximately 30% more on interest now than a year ago. 

“To put that in context, we spend about $800 billion on defense,” Fratantoni said. “We’re now spending $700 billion on interest. Financial markets are reacting to these kinds of numbers as well as to the challenges our government’s having and even reaching budget decisions.”

If another debt ceiling standoff occurs, the U.S. government would lower its own ability to meet its debt obligations and the nation would be more vulnerable to downgrades and default. 

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