For mortgage markets, concerns about the spread of variant strains of Covid roughly offset stronger than expected inflation data this week. Wednesday’s Fed meeting produced no surprises and the reaction was minor. As a result, rates ended the week with little change.
The reduced economic activity resulting from the pandemic has caused a decline in inflation, which has been one of the factors responsible for record low mortgage rates. However, investors are now concerned that the trend may have reversed and inflation may be heading higher. In December, the core PCE price index was 1.5% higher than a year ago, which was well above the consensus forecast, and up from an annual rate of increase of 1.4% last month.
After enormous swings due to the pandemic, gross domestic product (GDP), the broadest measure of economic activity, appears to be returning to more normal growth levels. GDP declined a stunning 31% annualized during the second quarter of 2020 and then increased at a comparable rate of 33% annualized during the third quarter. By contrast, fourth quarter GDP growth was 4.3% annualized, which was close to expectations, and more in line with historical readings.
As expected, the Fed made no changes in the federal funds rate or in its massive bond purchase program, and the meeting statement was very similar to the prior one. Officials noted that after a “sharp rebound” in economic activity over the summer, growth has “moderated in recent months.” There was no additional guidance on the magnitude or the duration of future bond purchases. The Fed intends to continue its highly accommodative monetary policy until its goals for unemployment and inflation are achieved.
Looking ahead, investors will continue watching Covid case counts and vaccine distribution. The monthly 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 index will be released on Monday and the ISM national services index on Wednesday.
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