Inflation and interest rates hit home

It makes sense to focus on the Federal Reserve’s favorite inflation gauge in the week ahead. After all, the central bank’s interest rate-setting group meets in three weeks. It is all but certain the committee will raise its short-term borrowing rate for the first time since the COVID-19 pandemic began.

The rate hike is expected to be the first of several this year as the agency shifts its focus to fighting inflation.

So, the Price Consumption Expenditure data due Friday will shape investor expectations heading into next month’s Fed rate decision. Will the central bankers ease into raising rates and increase by just a quarter percentage point? Or will the Fed want to send a strong signal it has the stomach to withstand the risk of upsetting the markets and the economy in its effort to squeeze high inflation out of the economy and start with a half percentage point rate hike?

That’s why the PCE report is important.

If investors want to gauge how people are responding to higher interest rates and the impact of inflation on the biggest investment for most Americans, they should look at the housing market data in the week ahead.

The Mortgage Bankers Association puts out data on new home loans and home refinance applications each week. The data rarely moves markets. Still, it’s an early sign of consumer confidence, inflation’s influence, and the price of borrowed money.

It is no surprise that market interest rates have risen in advance of the Fed likely doing the same next month. Nor is it a surprise that home loan rates have risen, and fewer people are looking to borrow.

Mortgage applications from home buyers have fallen more than 10% over the past two weeks. Applications to refinance a mortgage have plunged almost 16%. This fall-off in borrowing demand may show up in a slower housing market this spring.

Mortgages rates are at their highest level since 2019, yet loan sizes keep increasing thanks to very few homes for sale helping support higher prices, and fast-rising construction costs thanks to inflation.

Rising interest rates and inflation touch just about every corner of the housing market – from mortgages to remodeling to rents — making it worthwhile to watch borrowing demand in the weeks ahead.

Tom Hudson

If investors want to gauge how people are responding to higher interest rates and the impact of inflation on the biggest investment for most Americans, they should look at the housing market data in the week ahead.

Financial journalist Tom Hudson hosts “The Sunshine Economy” on WLRN-FM in Miami, where he is the vice president of news. He is the former co-anchor and managing editor of “Nightly Business Report” on public television. Follow him on Twitter @HudsonsView.



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