High Consumer Inflation Means More Fed Rate Hikes

Consumer inflation remains on the rise. The Fed’s favored gauge of inflation; the Core Personal Expenditure for August was 4.7% which was higher than market expectations and well above the Fed’s goal of 2%.

This means the Federal Reserve wants to keep rates higher for longer until inflation comes back down toward its 2% target rate. Fed rate hikes affect short-term rates like credit cards, auto loans, and home equity lines of credit and have no direct impact on home loan rates. Longer-term rates will go up if the economy can absorb all of the Fed rate hikes.

At the moment, it appears longer-term rates are showing signs the economy may not be able to absorb the rate hikes without seeing a recession. One indicator of an impending recession is the 2 and 10-yr Note yield curve inversion where the 2-yr interest rate is currently higher than the 10-yr. Going forward, watch 4.00% on the 10-yr Note as it represented a recent peak in long-term rates. If inflation recedes we may very well have seen a peak in long-term rates. The opposite is true.

Many economists predict that the yearly rate of inflation will slow as the year progresses. Consumers have already backed away from certain purchases due to higher prices. The only way to lure consumers to purchase those items is to lower the price. Once this happens on a broader scale, we will see inflation come down toward the Fed’s target.

If you’re still concerned about inflation or have additional questions, make sure you speak with a financial advisor. They can help you feel more confident about the market and investments you have.

Source: Mortgage Market Guide