Fed Eases

The Fed meeting on Wednesday confirmed that officials and investors share a similar outlook for a lower federal funds rate. The most significant economic report released this week revealed that consumer spending was much stronger than expected. Mortgage rates ended the week slightly higher but remain near the lowest levels of the year.

As expected, the Fed reduced the federal funds rate by 25 basis points. There were no significant surprises in the meeting statement, which continued to emphasize the high level of uncertainty in the economic outlook due to government policy changes. The statement noted the conflicting elements of the dual mandate of the Fed, since the labor market has weakened while inflation has risen. During the press conference following the meeting, Chair Powell described this as "quite an unusual situation," adding to the challenge for policy makers. Officials are placing more weight on labor market concerns, as their dot plot forecasts revealed average expectations for an additional 50 basis points in rate cuts before the end of the year, but the range of projections between officials was larger than usual. Investors anticipate 25 basis point rate cuts at each of the two remaining meetings this year. 

Lower rates were beneficial for mortgage applications again this week, according to the Mortgage Bankers Association (MBA). Applications to refinance jumped 58% from last week and were a massive 70% higher than one year ago. The average loan size for refinances rose to a record high. The share of adjustable-rate mortgages (ARM) for refinances climbed to 12.9% of total applications, the highest level since 2008. Purchase applications increased 3% from the prior week and were up 20% from last year at this time.

Looking ahead, investors will continue to watch for additional information about tariffs and monitor comments from Fed officials for hints about monetary policy later in the year. For economic reports, New Home Sales will be released on Wednesday and Existing Home Sales on Thursday. Personal Income and the PCE price index, the inflation indicator favored by the Fed, will be released on Friday.