Economic growth during the second quarter was weaker than expected, which was favorable for mortgage markets this week. The Fed meeting revealed no surprises and caused little reaction. As a result, mortgage rates ended the week a bit lower.
As expected, the Fed raised the federal funds rate by 75 basis points on Wednesday, matching the largest increase since 1994 seen at the last meeting, and indicated that more rate hikes are coming to fight inflation. Neither the meeting statement nor Chair Powell’s comments during the press conference revealed any unexpected shift in policy. What emerged was the message that officials will evaluate incoming economic data to determine the size of rate hikes going forward, meaning that investors should no longer count on receiving precise guidance in advance. Investors are now split about whether there will be an increase of 50 or 75 basis points at the next meeting in September.
Gross Domestic Product (GDP) is the broadest measure of economic activity. During the second quarter, GDP fell at an annualized rate of 0.9%, well below the consensus forecast for an increase of 0.5%, but an improvement from a decline of 1.6% during the first quarter. A wide range of components had negative readings including inventories, private investment, and government spending. Consumer spending on goods also declined, but this was more than offset by increased spending on services.
The PCE price index is the inflation indicator favored by the Fed. In June, core PCE was up 4.8% from a year ago, a little higher than expected, and up from 4.7% last month. For comparison, the annual rate of increase was below 2.0% during the first three months of 2021. One of the big questions for investors is how quickly inflation will moderate as disruptions due to the pandemic and the conflict in Ukraine are resolved.
Investors will look for additional Fed guidance on the pace of future rate hikes and bond portfolio reduction. Beyond that, the key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the ISM national manufacturing sector index will come out on Monday and the ISM national services sector index on Wednesday.