Trump calls for lower interest rates after release of January CPI report. Powell says Fed is in no hurry to cut rates, and bond market investors who fund mortgages are taking him at his word.
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Mortgage rates are on the rise again after a key inflation gauge came in hotter than expected Wednesday, and Federal Reserve Chairman Jerome Powell warned lawmakers not to expect more rate cuts anytime soon.
The latest reading of the Consumer Price Index (CPI) showed prices rose at an annual rate of 3 percent in January — the fourth consecutive move away from the Fed’s 2 percent inflation target, the Bureau of Labor Statistics reported.
After falling to 2.4 percent in September, CPI has been on the rise. The latest increase, driven by rising costs of shelter, energy and food, was a surprise to many economists. An annual update of seasonal factors may have overstated the month-over-month increase of 0.5 percent — nearly twice the 0.3 percent increase forecast by economists.
Powell, in delivering the Fed’s semiannual Monetary Policy Report to Congress Tuesday, told members of the Senate Banking Committee that policymakers “do not need to be in a hurry” to cut interest rates. Powell briefed members of the House Financial Services Committee Wednesday.
President Trump weighed in on social media after the January CPI data were released, posting that “Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!! Lets Rock and Roll, America!!!”
Yields on 10-year Treasury notes, a barometer for mortgage rates, were up 10 basis points Wednesday — a move that’s likely to be reflected in mortgage rates. Although Optimal Blue data lags by a day, data tracked by Mortgage News Daily showed rates on 30-year loans were up eight basis points Wednesday.
While the Fed lowered short-term interest rates by a full percentage point in the final four months of 2024, long-term interest rates for mortgages and government debt are determined by bond market investors.
Mortgage rates on the rise
After the Fed started cutting rates in September, mortgage rates climbed from a 2024 low of 6.03 percent on Sept. 17 to a 2025 high of 7.05 percent on Jan. 14, according to rate-lock data tracked by Optimal Blue.
After dropping back below 7 percent to a 2025 low of 6.78 percent on Feb. 6, rates on 30-year fixed-rate mortgages are on the rise again, averaging 6.83 percent Tuesday.
Some investors and economists are concerned that the Trump administration’s plans to impose tariffs, cut taxes and deport millions of immigrants could reignite inflation — a concern now shared by many consumers, surveys show.
In a Feb. 5 interview with Fox Business host Larry Kudlow, Treasury Secretary Scott Bessent said the Trump administration’s strategy for fighting inflation hinges on bringing down energy costs by boosting U.S. oil production.
Tariffs are “a means to an end” to bring manufacturing back to the U.S., Bessent said, that “in theory, would be a shrinking ice cube” as production comes back to the U.S.
An extension of the 2017 tax cuts signed into law by Trump should be accompanied by spending cuts, the Treasury Secretary said.
Last week’s dip in mortgage rates helped boost applications for refinancing, but demand for purchase mortgages remained weak, according to a weekly survey of lenders by the Mortgage Bankers Association.
Requests to refinance were up 10 percent week over week and 33 percent from a year ago, the MBA survey showed, but purchase loan applications were down a seasonally adjusted 4 percent week over week and up just 2 percent from a year ago.
Inflation on the rebound
The “all items” CPI was up 3 percent from a year ago in January, and core CPI — which excludes volatile food and energy prices — was up even more sharply, rising by 3.3 percent over the last 12 months.
Seasonal adjustments the Fed makes at the beginning of the year can be disruptive, and it’s dangerous to extrapolate from one month’s data, Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said in a note to clients.
The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, is closer to the Fed’s 2 percent target and well below the 7.25 percent post-pandemic high registered in June 2022.
“This forecast, as well as the likely revisions to January 2024’s data, suggest that core PCE inflation probably edged down to 2.7 percent in January, from 2.8 percent in December,” Tombs said. “If as we expect, the trend continues to slow over the coming months, we still think [Fed policymakers] will ease policy again in June.”
The CME FedWatch tool, which tracks futures markets to gauge investor sentiment of the probability of future Fed moves, showed investors on Wednesday see only a 42 percent chance of a June Fed rate cut, down from 59 percent on Tuesday and 74 percent on Feb. 5.
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