There are rumors that our Fed is considering an idea to abandon its present 2% target rate for inflation in favor of a floating target where inflation would be allowed to rise above 2% for some time before considering hiking rates.
This comes with two consequences that mortgage lenders, real estate agents, and would-be borrowers need to understand:
- If the Fed allows inflation to rise north of 2% before considering hiking rates, we are not likely to see a Fed rate hike anytime soon. This is because inflation is currently running at 1.6% and well beneath the Fed’s current target.
- If the Fed is successful in allowing inflation to rise, home loan rates will rise as well. Inflation is the main driver of long-term interest rates.
When the Fed says they want inflation to reach its 2% target, they are talking about the Core Personal Consumption Expenditure (PCE) year-over-year figure.
The Core PCE Index is typically delivered the third week of every month, and will be even more important to track should the Fed make changes to its current policy and decide to allow inflation to rise above its longstanding 2% target.
Bottom line: inflation currently remains tepid and is the major reason why long-term rates, like home loans, remain near three-year lows. If inflation rises, home loan rates will rise. The opposite is also true.
Forecast for the Week
The upcoming week will be centered around the two-day Fed meeting which kicks off on Tuesday, and ends with the release of the Monetary Policy Statement on Wednesday at 2:00 p.m. ET. The Fed will also release a set of economic projections with the statement while Fed Chair Powell will hold a press conference at 2:30 p.m. ET.
There is a zero percent chance of a change in the short-term Fed Funds Rate at this meeting. What Mr. Powell has to say could impact bond prices and rates, but the market feels that the Fed Chair will choose his words carefully as to not overly disrupt the markets.
The week will also feature inflation data from both the Consumer Price Index (CPI) and Producer Price Index (PPI). As mentioned, the Fed has recently reported that in 2020 it may raise its target range for inflation from 2% to possibly 2.5%, which means consumer inflation readings will be more important to track. Note, the Fed’s preferred measure of consumer inflation is the Core PCE and not the CPI measure.
Consumer spending will also be in the spotlight in the form of Retail Sales for November. The consumer has been carrying the U.S. economy. We shall see if it continues, leading up to this record holiday shopping season.
Finally, the markets will continue to be gripped by the back-and-forth headlines from the U.S./China trade issues.
Reports to watch:
- Productivity for the third quarter will be released on Tuesday.
- On Wednesday, the inflation reading Consumer Price Index will be reported, followed by the Producer Price Index Thursday.
- A key consumer spending report in Retail Sales will be delivered on Friday.