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Mortgage rates got more room to come down Wednesday after two data releases suggested inflation eased in March and the economy shrank during the first quarter, boosting the odds that the Federal Reserve will cut rates in June.
The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, showed prices rose 2.3 percent in March from a year ago, the Bureau of Economic Analysis reported. That’s closer to the Fed’s 2 percent goal than February’s PCE price index reading of 2.7 percent.
In a separate release, the bureau’s advance estimate of real gross domestic product (GDP) suggested that the economy shrank by 0.3 percent during Q1, thanks to a tariff-driven surge in imports and a decrease in government spending.
If that estimate holds, it would represent an abrupt turnaround from the 2.4 percent annual growth in real GDP during Q4 2024 and the first economic contraction since 2022.
A rush by businesses to import goods before tariffs took hold was a “huge drag” on net trade, economists at Pantheon Macroeconomics said in their latest U.S. Economic Monitor.
But the advance GDP report “probably greatly overstates the loss of momentum at the start of this year,” Pantheon economists Samuel Tombs and Oliver Allen wrote.
“That said, the April tariff shock has since worsened the picture dramatically,” Tombs and Allen said. “We think stagnation is the most likely outcome over the rest of this year, but a recession would become likely if the threatened additional reciprocal tariffs are imposed in full in July.”
Economy may have shrunk in Q1
The surge in imported goods, which were up more than 50 percent, dented growth by five percentage points, Mortgage Bankers Association Chief Economist Mike Fratantoni said in a statement.
“Clearly, businesses were rushing to get goods into the country and were willing to store them until they were needed for production,” Fratantoni said.
The U.S. trade deficit hit an all time high in March and job postings shrank more than forecasters were expecting, with a federal hiring freeze in place and uncertainty over the economy putting a chill on private sector hiring, according to reports released Tuesday.
Joel Kan
“Mortgage application activity, particularly for home purchases, continues to be subdued by broader economic uncertainty and signs of labor market weakness, dropping to the slowest pace since February,” MBA Deputy Chief Economist Joel Kan said of a drop in mortgage demand last week.
The MBA’s weekly survey of lenders showed applications for purchase mortgages were down by a seasonally adjusted 3 percent last week when compared to the week before, but still up 3 percent from a year ago. Requests to refinance were down 4 percent week over week but up 42 percent from a year ago.
At 6.70 percent on Tuesday, rates on 30-year fixed-rate mortgages were down 19 basis points from their April high of 6.89 percent and 35 basis points from a 2025 high of 7.05 percent registered on Jan. 14, according to rate lock data tracked by Optimal Blue.
Inflation trending down again
While the PCE price index is inching toward the Fed’s inflation goal of 2 percent, core inflation excluding food and energy costs also dropped to 2.6 percent, down from 3 percent in February.
Samuel Tombs
Real consumption rose more sharply from February to March than forecasters had expected, showing “households aren’t allowing their fears about the damage that tariffs will eventually bring weigh on their overall level of expenditure today,” Tombs said in a note to clients.
Surveys show consumer sentiment “became much gloomier in April,” Tombs said, but spending is unlikely to slow down until consumers have to pay higher prices for imported goods.
Pantheon economists are sticking with their forecast that the Fed will cut short-term interest rates three times this year, by a total of 75 basis points, beginning in June.
The CME FedWatch tool, which tracks futures markets to predict the likelihood of future Fed moves, on Wednesday put the odds of a June Fed rate cut at 67 percent, up from 65 percent on Tuesday and 59 percent on April 23.
Mike Fratantoni
“The quandary facing the Federal Reserve is that while the trend in the data is clearly showing a slowing economy, it also renewed upward pressure on inflation,” Fratantoni said. “We expect that the Fed will hold rates steady at its meeting next week and will indicate that it will continue to hold at this level until it becomes clear whether a recession or inflation is the bigger risk.”
In their latest forecast, Fannie Mae economists said they expect economic growth to slow to 0.5 percent this year, and that annual inflation will rise to 3.5 percent by the fourth quarter.
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