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With Inflation Uptick, Fed Hikes and Signals More to Come – Eye On Housing

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The Federal Reserve raised the federal funds rate by 25 basis points at the conclusion of its September policy meeting, bringing the target range to 3.75% to 4%. The decision comes amid renewed inflation concerns and an increase in long-term interest rates. Notably, the decision was unanimous 12-0 vote, reflecting a unified view to tackle renewed inflationary pressures.

With respect to economic conditions, the Federal Open Market Committee (FOMC) stated that “economic activity is expanding at a solid pace.” In fact, the Fed slightly upgraded its growth projections, and Chairman Warsh noted that the demand for capital has increased, leading to higher market interest rates. Additionally, the FOMC noted that “uncertainty remains elevated” due to “geopolitical developments,” which is a nod to current trade issues and the Iran war.

On inflation, the FOMC stated simply that “inflation remains elevated.” The Fed noted that today’s hike, which is in response to inflation rising to a 3.4% year-over-year rate, “will support a timelier return to the Committee’s two percent goal.”  Echoing recent statements from Chairman Warsh, President Trump’s pick to lead the Fed, today’s statement repeated that “the Committee will deliver price stability.” 

Today’s hike reflects a difficult policy environment. Long-term interest rates have increased in recent weeks as corporate firms issue more debt to finance technology investment and growth, while concerns persist over long-term federal budget constraints, and, most particularly in the short run, oil prices rise due to the Iran war. Together, these forces have increased financing costs for households and businesses, including home buyers and home builders.

The prior case for holding rates steady, or at least moving slowly, rested on the source of recent inflation. To the extent that higher prices reflected one-off adjustments, the Fed could potentially “look through” these increases rather than respond to each change with tighter policy. An increase in the price level does not necessarily imply a persistently higher inflation rate.

This distinction is particularly relevant for housing. While the central bank’s federal funds rate does not have a direct effect on mortgage rates, an increase in the funds rate does increase the cost of financing for builder acquisition, development and construction (AD&C) loans. Higher borrowing costs make it more difficult to finance new construction and reduce the purchasing power of prospective buyers via higher construction costs. Slower home building limits progress in addressing the housing affordability crisis, an underlying source of pressure on shelter costs and the problem of overall inflation.

Today’s Fed hike did not measurably change long-term interest rates, including the critical 10-year Treasury rate, as much of the increase was already priced into markets. The last few weeks of bond market changes suggest investors are demanding higher yields in response to inflation risks and other pressures. If higher energy prices begin to affect broader price-setting behavior and inflation expectations, waiting for conclusive evidence could leave the central bank with more work to do later. Additional constraints on oil products are a key concern whereby interest rates could move even higher.

Looking forward, the September SEP (Summary of Economic Projections) indicates a slightly stronger growth outlook relative to June. The median projection for real economic growth in 2026 is 2.3%, measured on a fourth-quarter-over-fourth-quarter basis, compared with 2.2% in June. (NAHB is forecasting 2.1% for 2026.) Growth is expected to register 2.4% in 2027 and 2.2% in 2028, with the newly added 2029 projection at 2.1%. The unemployment rate is projected to average 4.1% in the fourth quarter of 2026 and 4.1% in late 2027, suggesting tempered labor market conditions in the current “low hire, low fire” environment.

The median forecast for headline personal consumption expenditures (PCE) inflation in 2026 is 3.7%, while core PCE inflation, which excludes food and energy, is projected at 3.4%, compared with 3.3% in June. Core inflation is expected to decline to 2.5% in 2027 and 2.2% in 2028. The projections indicate a return to the Fed’s two-percent inflation objective in 2029. The process of getting to the Fed’s policy target will thus take more time given the number of supply-shocks affecting the U.S. economy. (It is worth noting that Chairman Warsh did not participate in the September SEP.)

With respect to monetary policy, the updated dot plot indicates a median federal funds rate of 4.1% at the end of 2026, implying one more rate hike in 2026 following today’s increase. The median projections for year-end 2027 and 2028 are 4.1% and 3.9%, respectively, with a 2029 projection of 3.6%. The longer-run rate estimate was revised higher to 3.2 compared to 3.1% in the June SEP.

Today’s outlook suggests an additional rate hike in December, with either flat conditions in 2027 or a combination of an additional hike and then an offsetting cut that year. These projections are conditional outlooks, rather than commitments.

There was also an important omission from today’s communications: the Fed did not discuss changes to balance sheet policy. This is relatively good news for the mortgage sector and home builders. Accelerated reductions in the Fed’s securities holdings, particularly mortgage-backed securities, would place additional upward pressure on mortgage rates.

For housing, the path of long-term rates, and the energy, fiscal and investment pressures influencing those rates, will remain critical in the months ahead.



This article was originally published by a eyeonhousing.org . Read the Original article here. .

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Inflation Persisted in August – Eye On Housing

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Inflation in August remained sticky as renewed tensions with Iran continued pushing up oil prices, keeping pressure on the Fed to consider a rate hike at its upcoming meeting. Gasoline prices returned as the largest driver of headline inflation, accounting for one-third of the monthly increase. While consumer goods prices showed signs of stabilization from earlier tariff impacts, recent trade conflicts with Canada could add to inflation pressures in coming months.

On a non-seasonally adjusted basis, the Consumer Price Index (CPI) rose by 3.4% in August from a year ago, following the same increase last month, according to the BLS latest report. The “core” CPI, excluding the volatile food and energy components, increased by 2.4% over the past twelve months, following a 2.5% increase in July. The housing shelter index, which makes up a large portion of the core CPI, rose 3.0% over the year, following a 3.2% increase last month. Meanwhile, the component index for food rose by 2.7% over the year, and the energy component index increased by 16.3%.

On a monthly basis, the CPI rose by 0.4% in August (seasonally adjusted), while the “core” CPI increased by 0.3%. The price index for a broad set of energy sources increased by 2.1% in August, as declines in natural gas (-1.1%) and electricity (-0.2%) were offset by increases in fuel oil (+10.1%) and gasoline (+3.9%). Meanwhile, the food at home index remained unchanged and the food away from home index rose by 0.3 in August.

Outside of energy, other top contributors that rose in August included indexes for communication (+2.3%), lodging away from home (+2.4%), airline fares (+2.7%), education (+0.8%) and used cars and trucks (+0.4%). Meanwhile, the indexes for medical care (-0.2%) and motor vehicle insurance (-0.8%) were among the major indexes that decreased over the month.

The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.3% in August, following a 0.1% increase last month. Both the index for owners’ equivalent rent (OER) and rent of primary residence (RPR) increased by 0.2% over the month.

NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than core inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster than core inflation, the real rent index rises and vice versa. The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components). In August, the Real Rent Index fell by 0.1%.



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PCE Inflation Remains Sticky – Eye On Housing

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The latest report shows the Federal Reserve’s preferred inflation gauge remains sticky in July, complicating the Fed’s path to its long-term 2% target. Meanwhile, consumer spending remains resilient but is showing signs of slowing, with real consumer spending unchanged in July. Households are pulling back on spending amid persistent inflation.

The headline Personal Consumption Expenditure (PCE) Price Index increased 3.7% in July from a year ago, unchanged from last month, according to the Commerce Department’s Bureau of Economic Analysis. The “core” PCE price index, which excludes food and energy, rose 3.3% over the past twelve months. Core PCE has held at 3.3% since the start of the Iran conflict, with the exception of a three-year high of 3.5% in May. This suggests inflation pressure persists even as energy prices slightly eased.

With elevated inflation, consumer spending slowed as the cushion from larger tax refunds faded. Consumer spending rose 0.2% in July, and real spending, adjusted to remove inflation, remained flat.

Meanwhile, personal income rose 0.4% in July. This growth was led by increases in compensation, government social benefits, and personal income receipts on assets. Real disposable income—income adjusted for taxes and inflation—was up 0.4% in July. On a year-over-year basis, personal income was 3.7% higher, and real (inflation-adjusted) disposable income was up 0.5%.

With income growth outpacing spending growth, the personal saving rate edged up to 3.0% in July, the highest level since April. This marks the first monthly increase since January.



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Inflation Eased Slightly in July – Eye On Housing

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Led by declines in gasoline and diesel prices, inflation eased for the second consecutive month after reaching a three-year high in May. As energy prices moderated, shelter resumed its role as the largest driver of headline inflation, accounting for one-third of the annual increase and over two-thirds of the monthly increase. Though easing inflation and a cooling labor market reduced pressure for Fed rate hikes, renewed tensions with Iran could keep inflation elevated in coming months, complicating the Fed’s path forward.

On a non-seasonally adjusted basis, the Consumer Price Index (CPI) rose by 3.4% in July from a year ago, following a 3.5% increase last month, according to the BLS latest report. The “core” CPI, excluding the volatile food and energy components, increased by 2.5% over the past twelve months, following a 2.6% increase in June. The housing shelter index, which makes up a large portion of “core” CPI, rose 3.2% over the year, following a 3.3% increase last month. Meanwhile, the component index for food rose by 3.0%, and the energy component index increased by 14.7%.

On a monthly basis, the CPI rose by 0.1% in July (seasonally adjusted), while the “core” CPI increased by 0.2%.

The price index for a broad set of energy sources decreased by 1.5% in July, as declines in gasoline (-2.9%) and fuel oil (-1.7%) were partially offset by minor increases in natural gas (+0.7%) and electricity (+0.1%). Meanwhile, food at home index decreased by 0.1% and food away from home index rose by 0.3 in July.

Outside of energy, other top contributors that rose in July included indexes for medical care (+0.4%), airline fares (+2.2%), communication (+0.6%), education (+0.5%) and recreation (+0.2%). Meanwhile, the index for motor vehicle insurance (-0.3%) was among the major indexes that decreased over the month.

The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.1% in July, matching last month as the smallest monthly increase since January 2021. Both the index for owners’ equivalent rent (OER) and rent of primary residence (RPR) increased by 0.3% over the month. NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than core inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster than core inflation, the real rent index rises and vice versa. The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components). In July, the Real Rent Index was unchanged.



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PCE Inflation Eased in June – Eye On Housing

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After reaching a three-year high last month, the Federal Reserve’s preferred inflation gauge eased in June following declines in energy prices amid a temporary truce with Iran. This marked the first monthly decline in six years. However, the resumption of conflict and a rebound in oil prices have reignited inflation concerns, suggesting this relief may be reversed in the coming months. This could challenge the Fed’s commitment to its price stability mandate.

The headline Personal Consumption Expenditure (PCE) Price Index increased 3.7% in June from a year ago, following a 4.1% increase in May, according to the Commerce Department’s Bureau of Economic Analysis. That marked the slowest annual pace in three months. The “core” PCE price index, which excludes food and energy, rose 3.3% over the past twelve months, down from 3.4% last month and matching March and April levels.

Despite the elevated inflation, consumer spending remained resilient as larger tax refunds and strong stock market gains provided a cushion for household finances. Consumer spending rose 0.3% in June, and real spending, adjusted to remove inflation, increased 0.4%.

Meanwhile, personal income rose 0.2% in June. This growth was led by increases in compensation, personal income receipts on assets, and government social benefits that were partly offset by a decrease in farm proprietors’ income. Real disposable income—income adjusted for taxes and inflation—was up 0.3% in June. On a year-over-year basis, personal income was 3.9% higher, and real (inflation-adjusted) disposable income was up 0.5%.

With spending growth outpacing income growth, the personal saving rate edged down to 2.7% in June, the lowest level since July 2022, when core CPI was near its peak. The saving rate has declined every month since January 2026. With inflation eroding compensation gains, households are dipping into savings to support spending, especially amid higher energy costs from the Iran war.



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Amid Supply-Side Inflation Pressures, The Fed Holds – Eye On Housing

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The Federal Reserve held the federal funds rate at a target range of 3.5% to 3.75% at the conclusion of its July policy meeting. There were three dissenting votes on the Federal Open Market Committee (FOMC), all of which supported raising the federal funds rate by 25 basis points. The July monetary policy hold marked the fifth consecutive hold, following 75 basis points of cuts at the end of 2025.

The central bank noted that “economic activity is expanding at a solid pace despite elevated uncertainty.” The Fed also stated that this uncertainty is due in part to the conflict in the Middle East. Additionally, Chairman Warsh noted at his press conference that the economy has shown “impressive resilience” in the face of these headline risks.

In a theme likely to receive growing attention in the quarters ahead, the Fed noted that productivity growth and capital investment are strong. Productivity growth, in particular, suggests future deflationary forces. The Fed also noted that the unemployment rate has experienced little change in recent data.

With respect to inflation, the Fed stated that “inflation remains elevated” relative to the central bank’s two percent target. Importantly, the Fed attributed these inflation challenges to “supply shocks,” including the energy sector.

If you squint a little, this can be seen as a dovish policy message because, while the Fed can affect aggregate demand by tightening monetary policy (as the bond market appears to expect), the central bank cannot effectively address supply shocks with policy. While this should not be interpreted as taking rate hikes off the table, it is an accurate statement of current macroeconomic conditions and many analysts’ views that the Fed cannot solve energy price increases due to war or one-off tariff effects with monetary policy. The same can be said about the impact of the housing deficit on the shelter component of overall inflation, which can only be addressed by other policies that bend the cost curve for housing supply.

From a policy perspective, the Fed noted very clearly, “The Committee will deliver price stability.” The Fed also explicitly emphasized the FOMC’s two percent inflation goal. Chairman Warsh reiterated this two percent goal clearly in his press conference. Moreover, the Fed Chairman noted that nominal long-term interest rates had moved higher since the last meeting, which he attributed to economic data rather than Fed forward guidance.

Indeed, the two-year Treasury rate is now 50 basis points higher than the top target rate for the federal funds rate, indicating that the bond market is expecting Fed tightening. However, one could also argue, as Chairman Warsh appeared to do so at his press conference, that the market has responded to the Fed’s current stance and goals and is delivering an environment in which market forces do the work of tighter policy. Chairman Warsh even suggested that despite the “no change” policy for the July meeting, other changes in market conditions indicate that the July meeting did not result in a policy “pause.”

There were important items not discussed in today’s statement, although they were referenced in today’s press conference. Chairman Warsh has established several task forces looking at Fed communications, forward guidance, data measurement (including how inflation is measured, a topic discussed at the Chairman’s press conference, suggesting new, preferred measures are coming), and other policy-related topics. We will learn more about those efforts down the road.

The Fed will also likely address the status of the central bank’s balance sheet, which can affect long-term interest rates, including mortgage rates, if balance sheet reduction were to be accelerated. These long-term rate changes, set by markets, are in the driver’s seat in the meantime.



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Inflation Cooled in June as Gas Prices Eased – Eye On Housing

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Inflation slowed to 3.5% in June from a three-year high last month, driven by a mid-June ceasefire agreement that stabilized oil markets and lowered energy prices. The decline in energy prices offset increases in shelter and food, resulting in a monthly decrease in inflation for the first time since April 2020. However, the relief could be short-lived as the ceasefire collapsed in early July has pushed oil prices up by 12% and renewed inflation concerns. 

On a non-seasonally adjusted basis, the Consumer Price Index (CPI) rose by 3.5% in June from a year ago, following a 4.2% increase last month, according to the BLS latest report. The “core” CPI, excluding the volatile food and energy components, increased by 2.6% over the past twelve months, following a 2.9% increase in May. The housing shelter index, which makes up a large portion of “core” CPI, rose 3.3% over the year, following a 3.4% increase last month. Meanwhile, the component index for food rose by 3.0%, and the energy component index increased by 15.7%.

On a monthly basis, the CPI fell by 0.4% in June (seasonally adjusted), while the “core” CPI remained unchanged.

The price index for a broad set of energy sources decreased by 5.7% in June, with decreases in gasoline (-9.7%), fuel oil (-9.2%), and electricity (-1.0%), with a minor increase in natural gas (+0.5%). Meanwhile, both food at home and food away from home indexes rose by 0.2 in June.

Outside of energy, other top contributors that fell in June included indexes for motor vehicle insurance (-2.0%), communication (-1.5%), apparel (-0.6%), medical care (-0.1%) and used cars and trucks (-0.2%). Meanwhile, the index for recreation (+0.5%), household furnishings and operations (+0.2%), and personal care (+0.2%) were among the few major indexes that increased over the month.

The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.1% in June, the smallest monthly increase since January 2021. The index for owners’ equivalent rent (OER) rose by 0.2%, while the index for rent of primary residence (RPR) increased by 0.1% over the month.

NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than core inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster than core inflation, the real rent index rises and vice versa. The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components). In June, the Real Rent Index rose by 0.1%.



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Mortgage Rates Increased in June as Markets Weigh Inflation and Fed Policy – Eye On Housing

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Mortgage rates continued to increase in June as markets priced in a rate hike due to high inflation and stronger-than-expected labor market. According to Freddie Mac, the 30-year fixed-rate mortgage averaged 6.49% in June, up 8 basis points (bps) over May. Since the conflict in the Middle East began, the 30-year mortgage rate has increased by 44 basis points. The average 15-year rate averaged 5.82% in June, up 8 bps from May, and up 39 basis points since the end of February. Even so, both rates remain lower than a year ago by 33 bps and 13 bps, respectively.

The 10-year Treasury yield, a key benchmark for long-term borrowing, held steady at an average of 4.48% in June. The 10-year yield surpassed 4.5% in the second week of the month following reports of persistent high inflation and a surprisingly resilient labor market. Furthermore, the latest Federal Open Market Committee (FOMC) meeting revealed that nine out of 18 Fed officials indicated at least one rate hike within the year.

Nonetheless, the 10-year Treasury yield eased later in the month, ending June at around 4.44%, as the United States and Iran reached a preliminary agreement and signed a Memorandum of Understanding (MoU). The agreement temporarily reopened the Strait of Hormuz to commercial shipping on a “toll-free” basis through mid-August to facilitate further negotiations over Iran’s nuclear program.



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PCE Inflation Hits 3-Years High in May – Eye On Housing

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As the Iran conflict pushed up energy prices, the Personal Consumption Expenditures (PCE) Price Index—the Federal Reserve’s preferred inflation gauge—accelerated to a three-year high in May. While oil and gasoline prices have declined in recent weeks as planned Strait of Hormuz reopening reduced the risk of further energy price spikes, inflation may stay elevated in the coming months due to underlying price pressures. This could challenge the Fed’s recommitment to its price stability mandate.

The headline PCE price index increased 4.1% in May from a year ago, following a 3.8% increase in April, according to the Commerce Department’s Bureau of Economic Analysis. That was the highest level since April 2023. The “core” PCE price index, which excludes food and energy, rose 3.4% over the past twelve months, the highest since May 2023.

Despite the elevated inflation, consumer spending remained resilient as larger tax refunds and strong stock market gains provided a cushion for household finances. Consumer spending rose 0.7% in May, and real spending, adjusted to remove inflation, increased 0.3%.

Meanwhile, personal income rose 0.7% in May. Real disposable income— income adjusted for taxes and inflation —was up 0.3% in May, the first increase after three monthly declines. On a year-over-year basis, personal income was 3.8% higher, and real (inflation-adjusted) disposable income remained unchanged, following last month’s largest annual decline since November 2022.

With spending growth outpacing income growth, the personal saving rate held at 3.0% in May, unchanged from last month but matching the lowest level since July 2022, when core CPI was near its peak. With inflation eroding compensation gains, households are dipping into savings to support spending, especially amid higher energy costs following the start of the Iran war.



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Inflation Surpassed 4% in May – Eye On Housing

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Inflation accelerated to a new three-year high in May, driven by continued increases in energy costs from the Iran war. Energy costs drove more than 60% of the monthly increase, with national gasoline prices jumping more than a dollar since the war began. Energy costs are straining household budgets and eroding purchasing power; inflation has now outpaced wage growth for the second straight month. As the ceasefire remains tenuous, energy prices are expected to remain elevated for months, continuing to put upward pressure on inflation and further complicating the Fed’s path toward its 2% target, especially given the recent strong job report.

On a non-seasonally adjusted basis, the Consumer Price Index (CPI) rose by 4.2% in May from a year ago, following a 3.8% increase last month, according to the BLS latest report. This was the largest annual increase since April 2023.

The “core” CPI, excluding the volatile food and energy components, increased by 2.9% over the past twelve months, following a 2.8% increase in April. The housing shelter index, which makes up a large portion of “core” CPI, rose 3.4% over the year, following a 3.3% increase last month. Meanwhile, the component index for food rose by 3.1%, and the energy component index increased by 23.5%, the largest annual increase since September 2022.

On a monthly basis, the CPI rose by 0.5% in May (seasonally adjusted), and the “core” CPI increased by 0.2%.

The price index for a broad set of energy sources rose by 3.9% in May, with increases in gasoline (+7.0%), fuel oil (+3.8%), and electricity (+0.6%), with a minor decline in natural gas (-0.5%). Meanwhile, the food at home index rose by 0.1%, while the food away from home index increased by 0.3% in May.

Outside of energy, other top contributors that rose in May included indexes for communication (+1.3%), airline fares (+2.7%), personal care (+1.0%) and recreation (+0.3%). Meanwhile, the index for motor vehicle insurance (-1.7%), household furnishings and operations (-0.6%), and new vehicle (-0.3%) were among the few major indexes that decreased over the month.

The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.3% in May. The index for owners’ equivalent rent (OER) rose by 0.3%, while the index for rent of primary residence (RPR) increased by 0.4% over the month. NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than core inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster than core inflation, the real rent index rises and vice versa. The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components). In May, the Real Rent Index rose by 0.2%.



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